Securities Law Commons^™

Changemakers: 'Hard Work, Determination, And Dedication': Arya Omshehe, Roger Williams University School Of Law

Life of the Law School (1993- )

No abstract provided.

Law School News: Omshehe Wins Top National Prize With Securities Regulation Article 11-4-2022, Michael M. Bowden

Life of the Law School (1993- )

No abstract provided.

Special Purpose Acquisition Companies (Spacs) And The Sec, Neal Newman, Lawrence J. Trautman

Faculty Scholarship

Special Purpose Acquisition Companies (SPACs) are simply enterprises that raise money from the public with the intention of purchasing an existing business and becoming publicly traded in the securities markets. If the SPAC is successful in raising money and the acquisition takes place, the target company takes the SPAC’s place on a stock exchange in a transaction that resembles a public offering. Also known as “blank-check” or “reverse merger” companies, this process avoids many of the pitfalls of a traditional initial public offering.

During late 2020 and 2021 an unprecedented surge in the popularity and issuance of Special Purpose Acquisition …

Regulating Financial Guarantors, Steven L. Schwarcz

Faculty Scholarship

To improve financial regulation, scholars have engaged in extensive research over the past decade to try to understand why systemically important financial firms engage in excessive risk-taking. None of that research fully explains, however, the unusually excessive risk-taking by financial guarantors such as bond insurers, protection sellers under credit-default-swap (CDS) derivatives, credit enhancers in securitization transactions, and even issuers of standby letters of credit. With tens of trillions of dollars of financial guarantees outstanding, the potential for failure is massive. This Article argues that financial guarantor risk-taking is influenced by a previously unrecognized cognitive bias, which it calls “abstraction bias.” …

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 …

One Size Does Not Fit All: A Contextual Approach To Fiduciary Duties Owed To Preferred Stockholders From Venture Capital To Public Preferred To Family Business, Juliet P. Kostritsky

Faculty Publications

This Article examines whether corporations should owe fiduciary duties to its preferred stockholders as preferred stockholders across all settings of preferred stock holding. In one context, sophisticated venture capitalists purchase preferred stock after carefully negotiating the stock price, control over the corporate governance, and other key stipulations by contract. Additionally, because the initial preferred stockholder could protect its interests through staged financing or board control, the preferred stockholder might not discount the stock even if it lacked protection since the other protective devices made the lack of such protections inconsequential so the initial holders won’t pay for these added fiduciary …

Constraining Monitors, Veronica Root

Journal Articles

Monitors oversee remediation efforts at dozens, if not hundreds, of institutions that are guilty of misconduct. The remediation efforts that the monitors of today engage in are, in many instances, quite similar to activities that were once subject to formal court oversight. But as the importance and power of monitors has increased, the court’s oversight of monitors and the agreements that most often result in monitorships has, at best, been severely diminished and, at worst, vanished altogether.

The lack of regulation governing monitors is well documented; yet, the academic literature on monitorships to date has largely taken the state of …

Carrot Or Stick? The Shift From Voluntary To Mandatory Disclosure Of Risk Factors, Karen K. Nelson, Adam C. Pritchard

Articles

This study investigates risk factor disclosures, examining both the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act as well as the SEC's subsequent mandate of these disclosures. Firms subject to greater litigation risk disclose more risk factors, update the language more from year to year, and use more readable language than firms with lower litigation risk. These differences in the quality of disclosure are pronounced in the voluntary disclosure regime, but converge following the SEC mandate as low-risk firms improved the quality of their risk factor disclosures. Consistent with these findings, …

Economic Crisis And The Integration Of Law And Finance: The Impact Of Volatility Spikes, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Articles

The 2008 financial crisis raised puzzles important for understanding how the capital market prices common stocks and in turn, for the intersection between law and finance. During the crisis, there was a dramatic five-fold spike, across all industries, in “idiosyncratic risk”—the volatility of individual-firm share prices after adjustment for movements in the market as a whole.

This phenomenon is not limited to the most recent financial crisis. This Article uses an empirical review to show that a dramatic spike in idiosyncratic risk has occurred with every major downturn from the 1920s through the recent financial crisis. It canvasses three possible …

The Systemic Risk Paradox: Banks And Clearinghouses Under Regulation, Felix B. Chang

Faculty Articles and Other Publications

Consolidation in the financial industry threatens competition and increases systemic risk. Recently, banks have seen both high-profile mergers and spectacular failures, prompting a flurry of regulatory responses. Yet consolidation has not been as closely scrutinized for clearinghouses, which facilitate trading in securities and derivatives products. These nonbank intermediaries can be thought of as middlemen who collect deposits to ensure that each buyer and seller has the wherewithal to uphold its end of the deal. Clearinghouses mitigate the credit risks that buyers and sellers would face if they dealt directly with each other.

Yet here lies the dilemma: large clearinghouses reduce …

Behaviorism In Finance And Securities Law, David A. Skeel Jr.

All Faculty Scholarship

In this Essay, I take stock (as something of an outsider) of the behavioral economics movement, focusing in particular on its interaction with traditional cost-benefit analysis and its implications for agency structure. The usual strategy for such a project—a strategy that has been used by others with behavioral economics—is to marshal the existing evidence and critically assess its significance. My approach in this Essay is somewhat different. Although I describe behavioral economics and summarize the strongest criticisms of its use, the heart of the Essay is inductive, and focuses on a particular context: financial and securities regulation, as recently revamped …

Rollover Risk: Ideating A U.S. Debt Default, Steven L. Schwarcz

Faculty Scholarship

This article examines how a U.S. debt default might occur, how it could be avoided, its potential consequences if not avoided, and how those consequences could be mitigated. To that end, the article differentiates defaults caused by insolvency from defaults caused by illiquidity. The latter, which are potentiated by rollover risk (the risk that the government will be temporarily unable to borrow sufficient funds to repay its maturing debt), are not only plausible but have occurred in the past. Moreover, the ongoing controversy over the federal debt ceiling and the rise of the shadow-banking system make these types of defaults …

The Greek Debt Restructuring: An Autopsy, Jeromin Zettelmeyer, Christoph Trebesch, Mitu Gulati

Faculty Scholarship

The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief—over 50 percent of 2012 GDP—with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdout creditors—that are likely to make future debt restructurings in Europe more difficult.

Shadow Banking, Financial Markets, And The Real Estate Sector, Steven L. Schwarcz

Faculty Scholarship

This is a relatively brief “firestarter” talk prepared by the author for the World Economic Forum’s Industry Partnership Strategists Meeting 2012 (held on October 3, 2012) on transformation of the real estate sector in light of ongoing shifts in the financial markets and broader global trends.

Shadow Banking, Financial Markets, And The Real Estate Sector, Steven L. Schwarcz

Faculty Scholarship

This is a relatively brief “firestarter” talk prepared by the author for the World Economic Forum’s Industry Partnership Strategists Meeting 2012 (held on October 3, 2012) on transformation of the real estate sector in light of ongoing shifts in the financial markets and broader global trends.

Making Sense Of The New Financial Deal, David A. Skeel Jr.

All Faculty Scholarship

In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance—including clearing and exchange …

Inside-Out Corporate Governance, David A. Skeel Jr., Vijit Chahar, Alexander Clark, Mia Howard, Bijun Huang, Federico Lasconi, A.G. Leventhal, Matthew Makover, Randi Milgrim, David Payne, Romy Rahme, Nikki Sachdeva, Zachary Scott

All Faculty Scholarship

Until late in the twentieth century, internal corporate governance—that is, decision making by the principal constituencies of the firm—was clearly distinct from outside oversight by regulators, auditors and credit rating agencies, and markets. With the 1980s takeover wave and hedge funds’ and equity funds’ more recent involvement in corporate governance, the distinction between inside and outside governance has eroded. The tools of inside governance are now routinely employed by governance outsiders, intertwining the two traditional modes of governance. We argue in this Article that the shift has created a new governance paradigm, which we call inside-out corporate governance.

Using the …

The Missing Monitor In Corporate Governance: The Directors' And Officers' Liability Insurer, Tom Baker, Sean J. Griffith

All Faculty Scholarship

This article reports the results of empirical research on the monitoring role of directors’ and officers’ liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the “bonding” provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance …

Does Analyst Independence Sell Investors Short?, Jill E. Fisch

All Faculty Scholarship

Regulators responded to the analyst scandals of the late 1990s by imposing extensive new rules on the research industry. These rules include a requirement forcing financial firms to separate investment banking operations from research. Regulators argued, with questionable empirical support, that the reforms were necessary to eliminate analyst conflicts of interest and ensure the integrity of sell-side research.

By eliminating investment banking revenues as a source for funding research, the reforms have had substantial effects. Research coverage of small issuers has been dramatically reduced—the vast majority of small capitalization firms now have no coverage at all. The market for research …

Predicting Corporate Governance Risk: Evidence From The Directors' & Officers' Liability Insurance Market, Tom Baker, Sean J. Griffith

All Faculty Scholarship

No abstract provided.

Economic Suicide: The Collision Of Ethics And Risk In Securities Law, Barbara Black, Jill I. Gross

Elisabeth Haub School of Law Faculty Publications

The first part of this article looks at whether there are any legal principles derived from regulation or the case law to support an “economic suicide” claim. The second part of the article reviews arbitrators' awards to determine whether arbitrators do, in fact, decide favorably on economic suicide claims. The article also looks at some arbitrators' awards that appear to recognize an economic suicide claim to identify any factors that may lead arbitrators to award damages to the claimant. Finally, in the third part, we address whether policy considerations support an extension of recognized brokers' duties to include a duty …

Hong Kong's Reformed Broker Contribution Rules, Lin (Lynn) Bai

Faculty Articles and Other Publications

Lynn Bai of the Hong Kong Securities and Futures Commission outlines the new risk-based calculation method for brokers' contributions to the stock clearing fund.

The Suitability Rule, Investor Diversification, And Using Spread To Measure Risk, Richard A. Booth Marbury Research Professor Of Law

Faculty Scholarship

This article reviews the state of the law regarding actions against broker-dealers based on the NASD suitability rule and similar theories, summarizes the theory and practice of investor diversification, explains the motivations that may lead a broker to recommend excessively risky securities and investment strategies, and discusses the various methods that may be used to quantify or compare risk, focusing in particular on how the bid-ask spread may be used as a forward-looking surrogate for the direct measurement of risk.