Securities Law Commons^™

Shadow Banking And Securities Law, Gabriel Rauterberg, Jeffery Y. Zhang

Faculty Scholarship

Shadow banking may be the single greatest challenge facing financial regulation. Financial institutions that function like banks, but fall outside the scope of banking regulation — aptly termed “shadow banks” — were at the heart of the Global Financial Crisis and most episodes of serious financial stress since then. Scholars have largely focused on one response to this problem: extending traditional banking regulation to shadow banks. Yet more than fifteen years after the crisis, major regulatory efforts along this route have stalled.

In this Article, we explore the uneasy case for greater regulation of shadow banking through a different route …

The Contractarian Joint Venture, Carla L. Reyes, Christine Hurt

Faculty Journal Articles and Book Chapters

In 2015, a group of entrepreneurs pooled their money together for the purpose of investing in other businesses. The entrepreneurs could have undertaken this activity through a traditional venture capital firm, but they wanted to cut out the middle-man, reduce fees, and retain more control over their capital, so they chose to undertake their investing on their own. The group of entrepreneurs chose not to form an entity. Instead, they attempted to limit their business and liability risk by conducting their activity entirely via software. Unfortunately, the software contained a bug, and an insider siphoned off millions of dollars belonging …

Regulatory Personhood: The Elixir For Redundancy Between The Sec And The Pcaob, Sarah Williams

Faculty Scholarly Works

The Public Company Accounting Oversight Board (“PCAOB” or “Board”) is a quasi-governmental regulatory agency created by Congress in 2002 in response to revelations of widespread financial fraud at major public companies. Since its creation, the agency has experienced significant challenges. Litigants have challenged its constitutionality, the Trump administration challenged its very existence, and legislation was introduced in 2021 to transfer its responsibilities to the U.S. Securities and Exchange Commission (“SEC”).

Proposals to eradicate the Board asserted vague concerns about the redundancy of its responsibilities with those of the SEC, and alleged resultant monetary waste. This Article, written in 2022, provides …

Should We Watch The Watcher Or The Watched? The Transparency Debate In Auditor Regulation, Sarah Williams

Faculty Scholarship

Federal law has mandated the use of outside auditors by public companies since 1934. For much of that time, the audit industry watched itself. It monitored audit quality and decided how to address auditor misconduct. In 2002, Congress created the Public Company Accounting Oversight Board (“PCAOB” or “Board”) to watch the auditors. The legislation designed a regulatory scheme that presumed audit performance could be improved through an open and cooperative relationship between the regulator and the regulated audit firm. Congress created accountability for the agency by mandating that it disclose its oversight activities to the public (an approach characterized as …

The Sec As An Entrepreneurial Enforcer, James J. Park

Northwestern University Law Review

The truth of disclosures by public companies is policed by both private plaintiffs and the Securities and Exchange Commission (SEC). The courts and many commentators have viewed the SEC as a more responsible enforcer than private litigants. Entrepreneurial enforcers with a profit motive have an incentive to advance questionable legal theories to expand the reach of Rule 10b-5, the primary federal prohibition of securities fraud. In contrast, the conventional view is that a public enforcer will bring straightforward cases against public companies. This Article argues that this perception is dated, and that the SEC has become more entrepreneurial in its …

The Crypto Revolution: A Comparative Analysis Of Crypto Regulation In The United States And The European Union, Joseph Galasso

Touro Law Review

Cryptocurrency is something that many people have heard of, but few truly understand the totality of it. From its emergence to the present form, cryptocurrency has become an innovative technology which has changed the way in which we use money. As seen time and time again, where there comes new technology comes governmental authorities introducing new laws to regulate these emerging industries. The aim of these laws and regulations is to protect consumers, but it is imperative not to overregulate the industry. The goal of regulation is to allow consumers to enjoy the benefits of the industry; however, one cannot …

Giant Asset Managers, The Big Three, And Index Investing, Dorothy S. Lund, Adriana Z. Robertson

Faculty Scholarship

A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost interchangeably by both academics and practitioners. This shorthand emerged in the foundational scholarship in this area, and while it may remain useful in certain contexts, its casual use obscures important features of the market and contributes to misperceptions. In this chapter, we demonstrate that it is a mistake to equate passive investing with index …

Undue Limitations In The Section 10(B) Purchaser-Seller Requirement, Marc I. Steinberg, Antonio R. Partida

Faculty Journal Articles and Book Chapters

This article considers different applications of the Purchaser-Seller Rule that a plaintiff must satisfy to bring a Section 10(b) and Rule 10b-5 private action. The history and development of the Purchaser-Seller Rule under Supreme Court and lower federal court jurisprudence is considered, with emphasis on recent case law unduly constricting this Rule. In particular, the Second Circuit’s restrictions on Section 10(b) standing are addressed, focusing on that appellate court’s decision in Frutarom which adhered to an overly formulaic approach to Section 10(b) standing that is out of line with prior Second Circuit and Supreme Court precedent. The article then considers …

Socially Acceptable Securities Fraud, Christine Hurt

Faculty Journal Articles and Book Chapters

What is a lie? Moreover, where is it a lie? Lies are bad. Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 create liability for issuer firms and individuals who make “an untrue statement of a material fact” or omit “a material fact required to be stated therein or necessary to make the statements therein not misleading.” In the ninety years since the passage of the Securities Exchange Act, however, the number of ways in which market participants may publicly disseminate statements that will be consumed by investors has exploded; does 10b-5 really apply to all these …

Speech Without Speakers: Eliminating Artificial Barriers To Pleading Corporate Scienter In Securities Fraud Claims, Jennifer Ligansky

Fordham Journal of Corporate & Financial Law

To successfully plead securities fraud claims under Rule 10b–5, the Private Securities Litigation Reform Act (“PSLRA”) requires that plaintiff-investors raise a “strong inference” that the defendant acted with scienter when issuing a false statement. But pleading scienter presents a challenging issue when the defendant is not a person, but an entity. When the defendant is a corporation, U.S. Circuit Courts of Appeals have adopted different approaches for determining whether the plaintiff has pleaded a strong inference of scienter. Some circuits hold that plaintiffs can raise a strong inference of corporate scienter only if the complaint identifies a speaker who knew …

Do The Securities Laws Actually Protect Investors (And How)? Lessons From Spacs, Patrick M. Corrigan

Journal Articles

From the Article

This Article identifies transactional innovation in public offering markets as a case study of how going-public transactions would work if issuers could choose to relax some of the investor protections provided under the securities laws. In recent years, private companies that wanted to go public had a meaningful choice between a traditional initial public offering and a merger with a special purpose acquisition corporation (SPAC). Most of the direct and indirect investor protections that ordinarily apply in the initial public offering context are relaxed in the SPAC context.

The Article argues that outcomes in SPAC markets, where …

Comment Letter On Sec’S Proposed Rule On Conflicts Of Interest Associated With The Use Of Predictive Data Analytics By Broker-Dealers And Investment Advisers, File Number S7-12-23, Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

This comment letter responds to the Securities and Exchange Commission’s proposed rule Release Nos. 34-97990; IA-6353; File Number S7-12-23 - Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers. Our comments draw on our scholarship relating to laypersons’ participation in securities markets and the corporate sector as well as on the role of technology in corporate governance.

We express concerns that the SEC’s proposed regulation undermines individuals’ ability to access capital markets in an efficient and cost-effective manner. In the era of excessive concentration of equities ownership and power, often with negative societal …

Corporate Democracy And The Intermediary Voting Dilemma, Jill E. Fisch, Jeff Schwartz

Utah Law Faculty Scholarship

Corporate governance is changing. For the past two decades, the focus of shareholder voting and engagement was deconstructing impediments to shareholder power and increasing managerial accountability. The goal of these interventions was to increase firm value by reducing agency costs. Increasingly, however, environmental and social issues have risen to the fore. This new focus is arguably more about values than value. This Article is the first to argue that, because of this shift, institutional intermediaries—namely, pension and mutual fund managers—can no longer vote and engage on the affairs of their portfolio companies without seeking the input of the pension-plan participants …

The Most Important Decision In Federal Securities Law - Texas Gulf Sulphur, Marc I. Steinberg

Faculty Journal Articles and Book Chapters

Although decided 55 years ago, the Second Circuit’s decision in Texas Gulf Sulphur may be viewed as the most important case under the U.S. securities laws. The decision addressed several landmark issues, including insider trading, company disclosure obligations, and the concept of materiality. Although a number of its rulings subsequently were rejected by the U.S. Supreme Court, others remain good law today. From a comparative perspective, Texas Gulf Sulphur also is a significant decision. Many of the principles enunciated by the Second Circuit in that decision today have been adopted by developed securities markets outside of the United States.

The Summary Judgment Revolution That Wasn't, Jonathan R. Nash, D. Daniel Sokol

Faculty Articles

The U.S. Supreme Court decided a trilogy of cases on summary judgment in 1986. Questions remain as to how much effect these cases have had on judicial decision-making in terms of wins and losses for plaintiffs. Shifts in wins, losses, and what cases get to decisions on the merits impact access to justice. We assemble novel datasets to examine this question empirically in three areas of law that are more likely to respond to shifts in the standard for summary judgment: antitrust, securities regulation, and civil rights. We find that the Supreme Court’s decisions had a statistically significant effect in …

What Twenty-First-Century Free Speech Law Means For Securities Regulation, Helen Norton

Publications

Securities law has long regulated securities-related speech--and until recently, it did so with little, if any, First Amendment controversy. Yet the antiregulatory turn in the Supreme Court's twenty-first-century Free Speech Clause doctrine has inspired corporate speakers' increasingly successful efforts to resist regulation in a variety of settings, settings that now include securities law. This doctrinal turn empowers courts, if they so choose, to dismantle the securities regulation framework in place since the Great Depression. At stake are not only recent governmental proposals to require companies to disclose accurate information about their vulnerabilities to climate change and other emerging risks, but …

The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel V. Rauterberg

Law & Economics Working Papers

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other …

Temporary Securities Regulation, Anita Krug

All Faculty Scholarship

In times of crisis, including the 2020-21 global pandemic, the U.S. Securities and Exchange Commission (SEC) has engaged in a type of securities regulation that few scholars have acknowledged, let alone evaluated. Specifically, during recent market crises, the SEC has adopted rules that are temporary, designed to help the securities markets and its participants—both public companies and public investment funds, such as mutual funds and ETFs—weather the crisis at hand but go no further. Once that goal has been accomplished, these rules usually expire, replaced by the permanent rules that they temporarily supplanted. Although the temporary-rulemaking endeavor is laudable—and arguably …

The Alchemy Of Effective Auditor Regulation, Sarah J. Williams

Lewis & Clark Law Review

The audit profession has repeatedly failed in its obligation to accurately opine on financial statements prepared by companies that trade in U.S. markets. The list of entities that have contributed to the quest for effective regulation of these auditors is long; it includes the American Institute of Certified Public Accountants (AICPA), the U.S. Securities and Exchange Commission (SEC), Congress, outside directors of public companies, and the Public Company Accounting Oversight Board (PCAOB), a recent congressional creation. Yet, despite 50 years of effort, the formula for efficacious oversight of the audit profession remains elusive.

This Article is the first in a …

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 …

Equity Market Structure Regulation: Time To Start Over, Paul G. Mahoney

Michigan Business & Entrepreneurial Law Review

Over the past half-century, the U.S. Securities and Exchange Commission (SEC)’s regulations have become key determinants of the way in which stocks trade and the fees that exchanges charge for their services. The current equity market structure rules are contained primarily in the SEC’s Regulation NMS. The theory behind Regulation NMS is that a system of dispersed markets operating pursuant to SEC-mandated information and order routing links will provide the benefits of consolidation and competition simultaneously.

This article argues that Regulation NMS has failed in that quest. It has produced fragmented markets and created questionable incentives for market participants, possibly …

A Historical Analysis Of The Investment Company Act Of 1940, Michael B. Weiner

Michigan Business & Entrepreneurial Law Review

More than 100 million Americans invest $25 trillion in mutual funds and exchange-traded funds (collectively, “funds”) regulated by the Investment Company Act of 1940 (the “Act”), making funds the predominant investment vehicle in the United States. Everyday investors rely on funds to save for retirement, pay for college, and seek financial security. In this way, funds demonstrate how “Wall Street” can connect with “Main Street” to improve people’s lives.

By way of background, funds are created by investment advisers (“advisers”) that provide investment advisory (e.g., stock selection) and other services to their funds in exchange for a fee. …

Stock Buyback Ability To Enhance Ceo Compensation: Theory, Evidence, And Policy Implications, Nitzan Shilon

Lewis & Clark Law Review

I report that stock buyback ability to enhance CEO compensation has reached a record high amount corresponding to one-third of total pay. Also, I refute the common wisdom that this ability is attributed mainly to buyback impact on per share criteria that determine annual bonuses. Instead, I show that because of recent reforms in executive compensation design, the ability of buybacks to boost the amount of CEO stock-based compensation has become ten times higher than their potential to increase annual bonuses. I argue, first, that the potential of stock buybacks to enhance their compensation provides CEOs with incentives to conduct …

The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel Rauterberg

Articles

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other …

Spoofing And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Sue S. Guan

Faculty Scholarship

Nearly a century after the United States enacted its first securities laws, urgent questions remain as to the scope of manipulation law: whether manipulation is possible in principle, and if so, how the law should respond in practice. Sharp disagreement among courts, economists, and legal scholars as to whether trading or quoting activity constitutes illegal manipulation has led to a legal framework that lacks precision and cogency. Moreover, the poorly articulated normative basis for court rulings has resulted in enforcement that is both under-inclusive and over-inclusive in ways that do a poor job of discouraging socially harmful transactions and enabling …

Redefining Accredited Investor: That's One Small Step For The Sec, One Giant Leap For Our Economy, Jeff Thomas

Michigan Business & Entrepreneurial Law Review

It may sound trivial, yet how we define accredited investor (AI) is critical. Among other things, U.S. securities laws and regulations make it easier for AIs to invest in privately held companies through “exempt offerings,” which are offerings not “registered” under the 1933 Securities Act. This results in AIs having investment opportunities that are unavailable to non-accredited investors (non-AIs). Moreover, the amount raised in exempt offerings has been increasing both absolutely and relative to the amount raised in registered offerings. In fact, the Director of the SEC’s Division of Corporate Finance recently indicated that “[c]ompanies raised $2.9 trillion in private …

The Proxy Problem: Using Nonprofits To Solve Misaligned Incentives In The Proxy Voting Process, Leah Duncan

Michigan Business & Entrepreneurial Law Review

Proxy advisory firms and their influence on the proxy voting process have recently become the subject of great attention for the Securities and Exchange Commission (“SEC”) among other constituencies. A glance at recent proxy season recaps and reports, many of which devote space to discussing proxy advisory firm recommendations, reveal the significance of this influence on institutional voting. As Sagiv Edelman puts it, “proxy advisory firms exist at the nexus of some of the most high-profile corporate law discussions—most notably, the shareholder voting process, which has recently been the subject of much scholarly and legal debate.” The SEC has responded …

From Inactivity To Full Enforcement: The Implementation Of The "Do No Harm" Approach In Initial Coin Offerings, Marco Dell'erba

Michigan Technology Law Review

This Article analyzes the way the Securities and Exchange Commission (“SEC”) has enforced securities laws with regard to Initial Coin Offerings (“ICOs”). In a speech held in 2016, the U.S. Commodities Futures Trading Commission (“CFTC”) Chairman Christopher Giancarlo emphasized the similarities between the advent of the blockchain technology and the Internet era. He offered the “do no harm” approach as the best way to regulate blockchain technology. The Clinton administration implemented the “do no harm” approach at the beginning of the Internet Era in the 1990s when regulators sought to support technological innovations without stifling them with burdensome rules.

This …

Shapeshifting Securities, Wendy Gerwick Couture

Articles

No abstract provided.

Securities Regulation And Social Media, Seth C. Oranburg

Loyola University Chicago Law Journal

Federal securities regulation originally divided corporate finance into two neat categories, public and private. In 1933, private financing was limited to “sophisticated” investors but otherwise lightly regulated. Public financing became heavily regulated. In 1982, the SEC introduced Reg D, which introduced the concept of “general solicitation” to clarify the distinction between public and private offerings. Reg D is well understood to prohibit newspaper advertisements and permit direct solicitations to venture capital investors. This enabled great wealth consolidation in regions like Silicon Valley while effectively banning general solicitations in private offerings.

Now, social media communication challenges the definition of “general solicitation.” …