Law Commons^™

The Exit Theory Of Judicial Appraisal, William J. Carney, Keith Sharfman

Faculty Publications

For many years, we and other commentators have observed the problem with allowing judges wide discretion to fashion appraisal awards to dissenting shareholders based on widely divergent, expert valuation evidence submitted by the litigating parties. The results of this discretionary approach to valuation have been to make appraisal litigation less predictable and therefore more costly and likely. While this has been beneficial to professionals who profit from corporate valuation litigation, it has been harmful to shareholders, making deals costlier and less likely to be completed.

In this Article, we propose to end the problem of discretionary judicial valuation by tracing …

Transition-Denial And Structural Adjustment: Causation And Culpability In The Cuban Economy Culpability In The Cuban Economy, Jose Gabilondo

Faculty Publications

In 2020, Cuba implemented the Tarea Ordenamiento (Tarea), the most significant economic reform since the construction of the socialist economy after the Revolution. Signaling an eclectic brand of Cuban socialism, the Tarea clears away three decades of tried and failed economic doctrines, drawing a new fiscal border around state enterprises, nodding to market realities, and preparing the island for greater insertion into the world economy. While the political economy of post-Castro Cuba has changed in this way, the United States continues to subject the island to an unprecedented program of unilateral sanctions, universally condemned as a breach of human rights, …

A Tokenized Future: Regulatory Lessons From Crowdfunding And Standard Form Contracts, Darian M. Ibrahim

Faculty Publications

This Article examines the world of risk investing in the cryptoeconomy. The broader crypto market is booming despite the latest downturn. People and institutions are buying in. The question is now how to regulate it.

This Article first tackles the question of whether coins, tokens, and other investable cryptoassets are securities. Second, for those cryptoassets that are not securities, this Article seeks to find a regulatory solution that balances promoting innovation with investor protection, just as the Securities and Exchange Commission (SEC) would do. To strike the right balance, this Article adopts a proposal by Ian Ayres and Alan Schwartz …

Unequal Investment: A Regulatory Case Study, Emily R. Winston

Faculty Publications

Growing economic inequality in the United States has reduced social mobility, placing financial security farther out of reach for a growing number of Americans. During the COVID-19 pandemic, U.S. stock prices have grown simultaneously with unemployment and food insecurity, highlighting the fact that prosperity is unequally distributed in the U.S. economy.

Many Americans do not benefit when the stock market soars because they do not have the means to invest. However, even ordinary American families who do have wealth to invest in the capital markets will face enormous obstacles in narrowing the wealth divide through investment. This is because ordinary …

The Obligations And Regulatory Challenges Of Online Broker-Dealers And Trading Platforms, Christine Lazaro, Teresa J. Verges

Faculty Publications

(Excerpt)

Investing has been evolving for decades. On “Mayday” in 1975, the SEC abolished fixed commissions, changing the face of the brokerage industry. A few months later, Charles Schwab opened its first offices, and discount brokerages were born. By the mid-1980s, there were over 600 discount brokers operating. By 1990, discount brokerage firms captured just under than 10% of the market, although Charles Schwab captured 40% of the discount brokerage market. Throughout the 1990s, new firms entered the market, including E*Trade and AmeriTrade. Online trading became more prevalent; by 1999 25% of all trades occurred online. The term “day trader” …

Pleading And Advocating A Negligence Claim Through The Regulation Best Interest Lens, Christine Lazaro, Michael S. Edmiston

Faculty Publications

(Excerpt)

On June 5, 2019, the SEC adopted the Regulation Best Interest Rule Package, consisting of (i) Regulation Best Interest: The Broker-Dealer Standard of Conduct (“Reg. BI”); (ii) Form CRS Relationship Summary and Amendments to Form ADV;(iii) the SEC Interpretation Regarding Standard of Conduct for Investment Advisers; and (iv) the SEC Interpretation Regarding the “Solely Incidental” Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser. Brokers were obligated to begin compliance with Reg. BI as of June 30, 2020.

Reg. BI contains four component sections mandating duties for brokers and firms: Disclosure, Care, Conflicts of Interest, and Compliance. …

Marginal Benefits Of The Core Securities Laws, Kevin S. Haeberle

Faculty Publications

To every thing there is a season. In the area of securities regulation in the United States, it is the season for expansion. This article shows why such expansion should not involve use of the core issuer disclosure, fraud, and insider trading laws to reduce information asymmetry in the stock market in the name of investor protection. I argue that any expansion of these laws focused on this secondary market should therefore be justified by distinct concerns (namely, efficiency ones). Moreover, any push to better serve and protect investors should be focused on other areas of securities law (such as …

An Overview Of Brokercheck And The Central Registration Depository, Christine Lazaro, Albert Copeland

Faculty Publications

(Excerpt)

Securities brokers are governed by a unique regulatory framework, subject to both extensive state and federal statutory and regulatory regimes. The vast bulk of federal regulation and oversight of brokers and brokerage firms has been delegated to the Financial Industry Regulatory Authority (“FINRA”), a self-regulatory organization with the power to govern its members’ conduct. FINRA operates under the oversight of the Securities and Exchange Commission (the “SEC”), a federal agency established by the federal securities laws.

FINRA was created on July 26, 2007 through the consolidation of the National Association of Securities Dealers (“NASD”) and the member regulation, enforcement …

The Emergence Of The Actively Managed Etf, Kevin S. Haeberle

Faculty Publications

Since the first exchange-traded fund began trading in 1993, the ETF form has attracted enormous investment flows. However, this triumph of the ETF has been overwhelmingly limited to the world of passive investment. Due to a mix of recent market innovation and regulatory change, this state of affairs is changing today. As I explain in this Article, there is much reason to believe that the actively managed ETF is now set to emerge as a significant feature of the investment landscape. And this emergence has important implications for, among others, the main parties that play key roles in protecting investors …

Underwriting Crowdfunding, Darian M. Ibrahim

Faculty Publications

Crowdfunding has more in common with an initial public offering (IPO) than may be readily apparent. Both are coordinated sales of securities to public investors (in crowdfunding's case, the "crowd"). Both rely on disclosure to mitigate information asymmetries between a company and its investors. Yet IPOs protect investors better for two reasons. First, companies undertaking an IPO have significant track records to disclose, unlike nascent startups. Second, IPOs are underwritten, meaning a reputational intermediary vouches for them.

This Essay considers applying underwriting to Regulation Crowdfunding (Regulation CF) to allow crowdfunding to mimic an IPO. It tackles questions such as: Who …

Real Insider Trading, Michael A. Perino

Faculty Publications

In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. The debate has, to this point, been based mostly on anecdote and conjecture rather than empirical evidence. This Article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess …

Information Asymmetry And The Protection Of Ordinary Investors, Kevin S. Haeberle

Faculty Publications

To some, the reductions in information asymmetry provided by the main securities-specific disclosure, fraud, and insider-trading laws help ordinary investors in meaningful ways. To others, whatever their larger social value, such reductions do little, if anything for these investors. For decades, these two sides of this investor-protection divide have mostly talked past each other.

This Article builds on economic theory to reveal something striking: The reductions in information asymmetry provided by the core securities laws likely impose a long-overlooked cost on buy-and-hold ordinary investors. More specifically, I explain why there is much reason to believe that the reductions take away …

The Lost History Of Insider Trading, Michael A. Perino

Faculty Publications

Common conceptions about the history of insider trading norms in the United States are inaccurate and incomplete. In his landmark 1966 book Insider Trading and the Stock Market, Dean Henry Manne depicted a world in which insider trading was both widespread and universally accepted. It was SEC enforcement efforts in the early 1960s, he contended, that swayed public opinion to condemn what had previously been considered a natural and unobjectionable market feature. For five decades, the legal academy has largely accepted Manne’s historical description, and the vigorous debates over whether the federal government should prosecute insider trading have assumed, …

Business Development Companies – The Basics, Christine Lazaro

Faculty Publications

(Excerpt)

Business Development Companies (“BDCs”) are a type of closed end fund. They were created by Congress in 1980, through amendments to the Investment Company Act of 1940 (the “1940 Act”).

BDCs were first created when a venture capital pool manager lobbied Congress to make it easier to invest in venture capital pools and private equity investments. While there was early interest in BDCs, their popularity waned through the 1990s. Since 2000, they have once again regained their popularity.

BDCs provide funding to small and mid-sized businesses. Following the financial crisis, BDCs were able to provide loans to businesses that …

An Overview Of The Regulation Best Interest Rule Package, Christine Lazaro

Faculty Publications

(Excerpt)

On June 5, 2019, the SEC adopted the Regulation Best Interest Rule Package. The package consists of Regulation Best Interest: The Broker-Dealer Standard of Conduct; Form CRS Relationship Summary and Amendments to Form ADV; Commission Interpretation Regarding Standard of Conduct for Investment Advisers; and Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser. This article will summarize each of the releases.

A New Market-Based Approach To Securities Law, Kevin S. Haeberle

Faculty Publications

Modern securities regulation has three main areas, each of which is plagued by a core problem. Mandatory disclosure law leaves society with suboptimal disclosure, as the government calls for too little of some information (for example, management analysis of company prospects) and too much of other information (for example, data about trivial executive perks). Securities fraud law (specifically, its central fraud-on-the-market theory of reliance) yields damages at odds with any reasonable theory of compensation and deterrence. And insider trading law fails to achieve its ends because incentives to police illegal trading and tipping by executives are currently weak.

In this …

Making A Market For Corporate Disclosure, Kevin S. Haeberle, M. Todd Henderson

Faculty Publications

It has long been said that market forces alone will result in a problematic under-sharing of information by public companies. Since the 1930s, the main regulatory response to this market failure has come in the form of the massive mandatory-disclosure regime that sits at the foundation of modern securities law. But this regime—especially when viewed along with its speech-chilling antifraud overlay—no doubt leaves society without all the corporate information from which it would benefit. The typical fix offered to the problem has been more of the same: add to the 100-plus-page list of what firms must disclose, often based on …

The Death Of Appraisal Arbitrage: Ending Windfalls For Deal Dissenters, William J. Carney, Keith Sharfman

Faculty Publications

In this article, we take note of a new and positive development in Delaware's law of appraisal: more robust enforcement of Section 262(h), which expressly excludes from fair value in appraisal litigation the value that is uniquely associated with the deal from which the shareholders seeking appraisal are dissenting. For public firms, this implies that deal dissenters are entitled to no more than the price that prevailed prior to the deal's announcement.

In a salutary development, the Delaware Chancery Court took this approach in its recent appraisal decision in Verition Master Fund Partners, Ltd. v. Aruba Networks, Inc., awarding …

Financial Exploitation Of The Elderly: An Overview Of Regulatory Action, Christine Lazaro

Faculty Publications

(Excerpt)

Financial exploitation of the elderly is a significant problem, which is only getting worse over time. A study by MetLife estimated that seniors lost $2.9 billion as a result of financial abuse, recognizing that the number was likely low due to underreporting of abuse. Each year, the elder population increases as the baby boomer generation ages. By the year 2050, it is estimated that 83.7 million people will be aged 65 or older, double what it was in 2012.

The Regulation Of Digital Investment Advice, Christine Lazaro

Faculty Publications

Digital investment advice, or robo-advice, is a growing trend in the financial services industry. It is expected that by 2022, robo-advisers will manage over $4 trillion in assets. Robo-advice covers a wide range of services, however all involve advice derived from algorithms. This article will discuss what robo-advice is as well as how it is regulated by the SEC and FINRA.

Discrimination Platforms, Kevin S. Haeberle

Faculty Publications

Off-exchange trading today has become defined by its opacity. Indeed, the framing of this symposium on What Happens in the Dark: An Exploration of Dark Pools and High Frequency Trading and its goal of "exam[ing] a portion of the modern market that remains largely outside of the public eye"l is much in line with contemporary thinking in policymaking, academic, and industry circles alike. Yet, off-exchange trading through "dark" pools and the like is far more transparent than thought, and exchange trading the opposite. In fact, much trading through off-exchange platforms is even more transparent than that facilitated by exchanges.

Despite …

Evaluating Stock-Trading Practices And Their Regulation, Merritt B. Fox, Kevin S. Haeberle

Faculty Publications

High-frequency trading, dark pools, and the practices associated with them have come under tremendous scrutiny lately, giving rise to much hot rhetoric. Missing from the discussion, however, is a principled, comprehensive standard for evaluating such practices and the law that governs them. This Article fills that gap by providing a general framework for making serious normative judgments about stock-trading behavior and its regulation. In particular, we argue that such practices and laws should be evaluated with an eye to the secondary trading market's impact on four main aspects of our economy: the use of existing productive capacity, the allocation of …

Supervision And Compliance Of Brokerage Firms, Christine Lazaro

Faculty Publications

Supervision is a cornerstone of broker-dealer regulation. It serves a number of important goals: primarily ensuring that the firms follow the governing rules and regulations so that investors can have confidence in the firms with which they do business. Unfortunately, FINRA supervision rules often do not set out specifically how a firm is to supervise its brokers. This article will set forth the general supervision rules governing brokerage firms, as well as the rules that govern specific behavior and conflicts.

Defining "Fiduciary": Differences In Fiduciary Standards Within The Securities Industry, Christine Lazaro

Faculty Publications

Investment professionals are subject to varying standards of conduct when providing advice to clients. The standards range from providing advice which is suitable to acting consistently with a fiduciary standard.

The article provides a brief history of the applicable securities statutes governing investment advice. It discusses the differences in the enactment of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Employee Retirement Income Security Act of 1974.

Next, the article discusses how each statute has impacted the standards applicable to brokers and investment advisers. Investment advisers are deemed fiduciaries. Brokers are held to the …

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 …

Regulatory Updates: Finra And Sec Rule Changes And Guidance Of Interest, Christine Lazaro

Faculty Publications

Over the past year, FINRA has proposed and approved new rules and amendments to its existing rules. FINRA has also issued supplemental guidance on existing rules. This article highlights those rule changes and guidance governing sales practice obligations of brokers, as well as the arbitration process. Additionally, this article will cover certain recently adopted SEC and CFTC rules.

Information-Dissemination Law: The Regulation Of How Market-Moving Information Is Revealed, Kevin S. Haeberle, M. Todd Henderson

Faculty Publications

No abstract provided.

Lawyers’ Obligations When Representing Clients With Diminished Capacity, Elissa Germaine

Faculty Publications

(Excerpt)

Lawyers have a significant role to play in protecting clients with diminished capacity from financial exploitation. PIABA members, in particular, see the issue from a unique vantage point – usually after a person with diminished capacity (or a family member or concerned third party) notices a drop in value in his or her brokerage account and approaches the lawyer to help figure out what happened in the account and, if appropriate, to pursue a claim to recover damages. As such, members must understand their own obligations as lawyers to clients with diminished capacity, obligations that apply in the context …

A 360 Degree View Of Roles And Responsibilities Concerning Diminished Capacity: Financial Advisers’ Obligations To Clients, Lawyers Representing Clients, And Lawyers Preparing Their Practices, Elissa Germaine, Nicole G. Iannarone, Teresa Verges

Faculty Publications

(Excerpt)

Aging is inevitable and impacts everyone. The risk of a person developing cognitive impairment or some other incapacity affecting daily life increases with each passing year. While some will live long lives without suffering from cognitive decline, others will not be so fortunate. One thing is clear: seniors have the greatest risk of developing some form of impairment that will impact their ability to make their own decisions and that will put them at risk of fraud by predators or of harm by well-intentioned but ill-informed persons seeking to help them. As lawyers representing clients in FINRA proceedings, PIABA …

Sec In-House Tribunals: A Call For Reform, Drew Thornley, Justin Blount

Faculty Publications

I IN the aftermath of the 1929 crash of the stock market and during the height of the Great Depression, the federal government took steps to strengthen U.S. securities laws.1 To that end, via the Securities Exchange Act of 1934, the U.S. Congress (Congress) created the U.S. Securities and Exchange Commission (SEC), whose “mission [is] to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”2 As “the primary overseer and regulator of the U.S. securities markets,” the SEC has the power to bring enforcement actions against parties it believes to be in violation of the nation’s securities …