Securities Law Commons^™

Stock Market Futurism, Merritt Fox, Gabriel Rauterberg

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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 …

Rest In Peace, Rule 505, Wendy Gerwick Couture

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After 37 years in existence,1 the Rule 505 exemption from registration has been repealed, effective May 22, 2017. This essay reviews the evolution of Rule 505 over its lifetime; examines Rule 505’s role within Regulation D and analyzes why that role eventually became obsolete; and argues that Rule 505 leaves behind a legacy that should continue to inform policy discussions about exemptions from registration.

Too Big To Disclose: Firm Size And Materiality Blindspots In Securities Regulation, George S. Georgiev

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This Article argues that the securities disclosure regime contains previously unexamined structural deficiencies that pertain to the information provided by the largest public companies. These deficiencies arise from the operation of the materiality standard, a core element of the disclosure regime that is used in a number of SEC disclosure rules. The materiality standard is designed to limit firms' disclosure to information that would be of importance to investors, and to prevent the overproduction of information. I suggest, however, that in the case of large firms the materiality standard can also lead to the underdisclosure of information-or to "materiality blindspots." …

Glass Half-Empty Approach To Securities Regulation, Wendy Gerwick Couture

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In this Article, I propose a novel approach, which I call the “glass-half-empty” approach, to analyze the appropriate boundaries of securities regulation. This approach assumes a baseline of “full” regulation and then analyzes which regulations should be stripped away because the costs exceed the benefits. This is the opposite of the traditional approach, which assumes a baseline of zero regulation, identifies a market failure, and then weighs the costs and benefits of regulatory intervention.

Although, in theory, the two approaches should reach the same conclusions about the appropriate bounds of securities regulation, the glass-half-empty approach yields new insights because it …

Risk Of Regulatory Arbitrage: A Response To "Securities Regulation In Virtual Space", Wendy Gerwick Couture

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In Securities Regulation in Virtual Space, Eric C. Chaffee explores the potential applicability of the securities laws to virtual transactions based on virtual activity and argues that, although many of these transactions likely qualify as “investment contracts” under S.E.C. v. W.J. Howey Co., they should be excluded under the context clause because, among other reasons, application of the securities laws would stifle creativity within this innovative space. This Response proposes a reframing of the Howey test as a response to the risk of regulatory arbitrage, argues that the context clause should only exclude transactions that do not pose such …

The Shadow Of Free Enterprise: The Unconstitutionality Of The Securities & Exchange Commission's Administrative Law Judges, Linda Jellum

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Six years ago, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), for the first time giving the Securities and Exchange Commission (SEC) the power to seek monetary penalties through its in-house adjudication. The SEC already had the power to seek such penalties in federal court. With the Dodd-Frank Act, the SEC's enforcement division could now choose between an adjudication before an SEC Administrative Law Judge (ALJ) or a civil action before an Article III judge. With this new choice, the SEC realized a significant home-court advantage. For example, in 2014, the SEC's enforcement division prevailed …

The Sec's Shift To Administrative Proceedings: An Empirical Assessment, Stephen J. Choi, Adam C. Prichard

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Congress has repeatedly expanded the authority of the SEC to pursue violations of securities laws in proceedings adjudicated by the SEC's own administrative law judges, most recently through the Dodd-Frank Act. We report the results from an empirical study of SEC enforcement actions against non-financial public companies to assess the impact of the Dodd-Frank Act on the balance between civil court and administrative enforcement actions. We show a general decline in the number of court actions and an increase in the number of administrative proceedings post-Dodd-Frank. At the same time, we show an increase in average civil penalties post-Dodd-Frank for …

The Other Securities Regulator: A Case Study In Regulatory Damage, Anita K. Krug

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Although the Securities and Exchange Commission is the primary securities regulator in the United States, the Department of Labor also engages in securities regulation. It does so by virtue of its authority to administer the Employee Retirement Income Security Act (ERISA), the statute that governs the investment of retirement assets. In 2016, the DOL used its securities regulatory authority to adopt a rule that, for the first time, designates securities brokers who provide investment advice to retirement investors as fiduciaries subject to ERISA's stringent transaction prohibitions. The new rule's objective is salutary, to be sure. However this Article shows that, …

Price Impact Possibilities, Wendy Gerwick Couture

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No abstract provided.

Digital Self-Ownership: A Publicity-Rights Framework For Determining Employee Social Media Rights, Susan Park, Patricia S. Abril

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No abstract provided.

The Sec, Administrative Usurpation, And Insider Trading, Adam C. Pritchard

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The history of insider trading law is a tale of administrative usurpation and legislative acquiescence. Congress has never enacted a prohibition against insider trading, much less defined it. Instead, the SEC has led in defining insider trading, albeit without the formality of rulemaking, and subject to varying degrees of oversight by the courts. The reason why lies in the deference that the Supreme Court gave to the SEC in its formative years. The roots of insider trading law are commonly traced to the SEC’s decision in Cady, Roberts & Co. Cady, Roberts was only made possible, however, by the …

An Empirical Study Of Implicit Takings, James E. Krier, Stewart E. Sterk

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Takings scholarship has long focused on the niceties of Supreme Court doctrine, while ignoring the operation of takings law “on the ground” – in the state and lower federal courts, who together decide the vast bulk of all takings cases. This study, based primarily on an empirical analysis of more than 2,000 reported decisions over the period 1979 through June 2012, attempts to fill that void.The study establishes that the Supreme Court’s categorical rules govern almost no cases, and that takings claims based on government regulation almost invariably fail. By contrast, when takings claims arise out of government action other …

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

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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

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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 …

Sec Investigations And Securities Class Actions: An Empirical Comparison, Stephen J. Choi, Adam C. Pritchard

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Using actions with both an SEC investigation and a class action as our baseline, we compare the targeting of SEC-only investigations with class-action-only lawsuits. Looking at measures of information asymmetry, we find that investors in the market perceive greater information asymmetry following the public announcement of the underlying violation for class-action-only lawsuits compared with SEC-only investigations. Turning to sanctions, we find that the incidence of top officer resignation is greater for class-action-only lawsuits relative to SEC-only investigations. Our findings are consistent with the private enforcement targeting disclosure violations at least as precisely as (if not more so than) SEC enforcement.

Uncertain Futures In Evolving Financial Markets, Anita K. Krug

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Today's publicly offered investment funds, including mutual funds, have ever more diverse investment strategies, as they increasingly invest in financial instruments that, in earlier years, had been the province of only the most sophisticated investors. Although the new landscape of investment possibilities may substantially benefit retail investors, one financial instrument attracting increasing amounts of retail investors' assets is acutely troublesome: the commodity futures contract. Futures originated as a means for farmers and other producers of agricultural commodities to ensure that their products could be sold at reasonable prices. Early on, the goals of futures regulation centered on one particular risk …

Paying High For Low Performance, Steven A. Bank, George S. Georgiev

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This Essay argues that regulatory reforms in the area of executive compensation introduced by the Dodd-Frank Act of 2010 have not yet achieved their purpose of linking executive pay with company performance. The rule on shareholder say-on-pay appears to have had limited success over the five proxy seasons since its adoption. The rule on pay ratio disclosure, adopted in August 2015, and the rules on pay-versus-performance disclosure and the clawback of certain incentive compensation, proposed in April 2015 and July 2015, respectively, are also unlikely to succeed. For the most part, the rules are intuitive and well-intentioned, but a closer …

Answering Halliburton Ii's Unanswered Question: Burdens Of Production And Persuasion On Price Impact At Class Certification, Wendy Gerwick Couture

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No abstract provided.

Dirks And The Genesis Of Personal Benefit, Adam C. Pritchard

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In United States v. Newman, the Second Circuit overturned the insider trading convictions of two hedge fund managers who received material nonpublic information from public companies via an extended tipping chain. The Newman court interpreted the Supreme Court's decision in Dirks v. SEC as requiring that the government prove: (1) that the tippee knew that the tipper was disclosing the information in exchange for a personal benefit; and (2) that if the personal benefit does not involve a quid pro quo to the tipper, that the disclosure arise from a "meaningfully close personal relationship" with the recipient of the …

Class-Action Tolling, Federal Common Law, And Securities Statutes Of Repose: A Recommendation, Wendy Gerwick Couture

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This Essay focuses on a narrow, but potentially outcome determinative, question: Does the filing of a securities class action toll the three-year outer time limit applicable to claims under sections 11 and 12(a)(2) of the Securities Act and the five-year outer time limit applicable to claims under section 10(b) of the Securities Exchange Act, such that potential class members-after a decision on class certification-can assert an individual federal action, even if those outer time limits would have elapsed absent tolling? There is currently a circuit split on this issue, with the Tenth Circuit answering "yes" and the Second Circuit answering …

Materiality And A Theory Of Legal Circularity, Wendy Gerwick Couture

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This Article argues that the materiality doctrine, which lies at the heart of securities fraud, has the potential to operate as a self-fulfilling prophecy. This Article labels this phenomenon "legal circularity." In order to place the potential legal circularity of materiality in context among the various other legal doctrines that share this potential, this Article proposes a two part Theory of Legal Circularity. First, this Article proposes the following Legal Circularity Test to identify potentially circular doctrines: A legal doctrine is potentially circular if: (1) the legal doctrine incorporates the behavior or attitude of a population or person, either hypothetical …

Professor Alan R. Bromberg And The Scholarly Role Of The Treatise, Wendy Gerwick Couture

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No abstract provided.

False Statements Of Belief As Securities Fraud, Wendy Gerwick Couture

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No abstract provided.

Halliburton Ii: A Loser's History, Adam C. Pritchard

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The Supreme Court was presented with an opportunity to bring fundamental reform to securities class actions last term in Halliburton Co. v. Erica P John Fund, Inc.. The Court ducked that opportunity, passing the buck to Congress to undo the mess that the Court had created a quarter century prior in Basic Inc. v. Levinson. Congress's history in dealing with securities class actions suggests that reform is unlikely to come from the legislature anytime soon. The Securities and Exchange Commission appears to be satisfied with the status quo as well. With these institutional actors resisting reform, corporations and …

Recklessness As A State Of Mind In 10(B) Cases: The Civil-Criminal Dialectic, Patricia S. Abril, Ann M. Olazabal

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No abstract provided.

Rethinking Insider Trading Regulation, Caroline Bradley

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No abstract provided.

From Basic To Halliburton, M. Todd Henderson, Adam C. Pritchard

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Securities fraud class actions are big business for lawyers. Since 1996, nearly 4,000 suits have been filed, with the majority resulting in companies paying substantial settlements. The top 10 settlements alone totaled about $35 billion; plaintiffs' lawyers took home billions in fees. Companies paid their own lawyers similar sums for defending them. If spending these gigantic sums on lawyers deterred corporate fraud (that is, if they helped sort cases of actual fraud from mere business reverses), then that might be money well spent. But if lawyers are paid billions without reducing the probability or magnitude of corporate fraud, then from …

Market Efficiency And The Problem Of Retail Flight, Alicia J. Davis

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In 1950, 91 % of common stock in the U.S. was owned directly by individual inves­ tors. Today, that percentage stands at only 23%. The mass exodus of retail investors and their investment dollars has negative implications not only for capital formation and investor protection, but also for market efficiency. Individual investors are often assumed to be noise traders who distort stock prices and harm market functioning. Therefore, some argue that their withdrawal from the market should be of little concern; indeed, it should be celebrated. Recent empirical evidence calls this assertion of retail noise trading into doubt, and this …

Reverse Cross-Listings - The Coming Race To List In Emerging Markets And An Enhanced Understanding Of Classical Bonding, Nicholas C. Howson, Vikramaditya Khanna

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Studies have found that when a U.S. issuer lists abroad on a foreign exchange, its shares exhibit negative abnormal returns. This negative movement may be because the market expects that the foreign listing will facilitate undetectable insider trading on the foreign exchange or other conduct impermissible in the United States.

The Influence Of Arbitrator Background And Representation On Arbitration Outcomes, Adam C. Pritchard, Stephen J. Choi, Jill E. Fisch

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We study the role of arbitrator background in securities arbitration. We find that several aspects of arbitrator background are correlated with arbitration outcomes. Specifically, industry experience, prior experience as a regulator, and status as a professional or retired arbitrator are correlated with statistically significant differences in arbitration awards. The impact of these characteristics is affected by whether the arbitrator in question serves as the panel chair and by whether the parties to the arbitration are represented by counsel. Our findings offer some preliminary insights into the debate over possible arbitrator bias. On the one hand, they suggest that the party …