A Quarter-Century of Market Developments—What Should A New "Special Study" Study?
Milton H. Cohen, 45(1): 3–13 (Nov. 1989)
This Article, although recognizing that the new special study of securities markets authorized by Congress in 1988 may never occur, discusses why such a study may be desirable in light of vast changes —in market participants, trading markets, market regulation, and corporate disclosures, finance, and governance—that have resulted from institutionalization, advances in automation, globalization, and other fundamental developments since the 1963 Special Study. The Article then offers some general suggestions about how a new special study should be conducted as well as a tentative list of broad subjects that might be included. The Article is prefaced by introductory remarks from James H. Cheek III. See Introduction to What Should A New "Special Study" Study?, 45 BUS. LAW. 1(1989).
The Scienter Requirement Under Rule 10b-6
Fred N. Gerard and Michael Hirschfeld, 46(3): 777–96 (May 1991)
SEC rule 10b-6 regulates trading by participants in a distribution of securities. This Article rejects the notion that the rule permits the imposition of absolute or per se liability, arguing that, because of its uniquely antimanipulative focus, the rule requires a showing of scienter—in the form of an actual intent to interfere with the market as an independent pricing mechanism—in order to make out a violation. As promulgated under section 10(b) of the Exchange Act, the rule cannot exceed the authority conferred by that provision, which the Supreme Court has found to require scienter. The addition in 1987 of certain other legislative bases for the rule did not obviate the scienter requirement.
Hegemony or Deference: U.S. Disclosure Requirements in the International Capital Markets
Edward F. Greene, Daniel A. Braverman, and Sebastian R. Sperber, 50(2): 413–45 (Feb. 1995)
This Article explores some of the main arguments for and against changing existing U.S. disclosure requirements insofar as they relate to non-U.S. issuers that offer their securities publicly in the United States or obtain a U.S. listing of their securities and the relative benefits of a number of alternatives. It considers, in detail, an approach based upon greater deference to home-country disclosure standards in circumstances where the secondary market can be said to price shares efficiently.
Competition Versus Consolidation: The Significance of Organizational Structure in Financial and Securities Regulation
John C. Coffee, Jr., 50(2): 447–84 (Feb. 1995)
A debate has persisted over whether regulatory agencies with jurisdiction over competing markets should be merged. This Article examines the case for both regulatory competition and regulatory consolidation against the complex institutional reality that each purports to assess. The author concludes that, although regulatory competition can result in modest gains, it can also cause hidden and substantial costs. In turn, regulatory consolidation can stifle innovation and new product development. In the case of competition versus consolidation, there is no clear winner. To address this fact and the need for checks and balances in a system of financial and securities regulation, the author proposes a possible compromise between competition and consolidation.
Another Unspecial Study: The SEC's Market 2000 Report and Competitive Developments In the United States Capital Markets
Joel Seligman, 50(2): 485–526 (Feb. 1995)
In this Article, the question is posed: What regulatory changes, if any, are needed for our evolving securities markets? The simple answer is that we need better research to provide thoughtful responses. In this Article, the author examines the further questions we need to study in order to have a more comprehensive view of our evolving securities markets.
The Capital Asset Pricing Model: Risk Valuation, Judicial Interpretation, and Market Bias
Jeffrey S. Glaser, 50(2): 687–716 (Feb. 1995)
Financial economic theory dictates that rational investors should diversify their portfolios in order to minimize exposure to risk. Integral to this theory is the way in which markets value risk. The capital asset pricing model, a generally accepted representation of the manner by which markets determine stock prices, provides an instructive theoretical breakdown of the components of risk. This Comment examines how some courts attempt to value risk when determining securities damages and why they may inadvertently overcompensate investors for risk never taken. It notes that, in a dynamic environment, incorrect risk valuation by courts could cause a systematic market bias. As a result, this may lead to profound adverse effects, such as inefficient capital allocation and more costly monitoring mechanisms.
Why Revlon Applies to Nonprofit Corporations
Colin T. Moran, 53(2): 373–95 (Feb. 1998)
Most state laws require nonprofit corporations which convert to for-profit status to contribute the fair market value of the organization, valued as an ongoing business, to charity. Aggressive, for-profit buyers, however, have repeatedly bought hospitals and health management organizations worth hundreds of millions of dollars at undervalued prices. This Article argues that boards of nonprofit corporations engaged in conversion transactions, like boards of for-profit corporations engaged in sale-of-control transactions, face the strict standard of fiduciary responsibility outlined in Revlon.
The Core Institutions that Support Strong Securities Markets
Bernard Black, 55(4): 1565–1607 (Aug. 2000)
A strong securities market rests on a complex network of supporting institutions that ensure that minority shareholders (i) receive good information about the value of a company's business, and (ii) can have confidence that a company's managers and controlling shareholders will not cheat them out of most or all of the value of their investment. A country whose laws and related institutions fail on either count cannot develop a strong stock market, forcing firms to rely on internal financing or bank financing— both of which have important shortcomings. This Article explains why these two investor protection issues are critical, related, and hard to solve and discusses which laws and institutions are most important for each.
Regulatory Competition in International Securities Markets: Evidence from Europe in 1999-Part I
Howell E. Jackson and Eric J. Pan, 56(2): 653 (Feb 2001)
As the first installment of a two-part series, this Article reports the results of an empirical investigation designed to explore whether capital-raising practices in Europe in 1999 might illuminate the on- going debate in U.S. academic circles over the value of regulatory competition in international securities markets. Drawing on a series of fifty in-depth interviews with lawyers, investment bankers, and regulators from London and other European financial centers, this Article presents new data about capital-raising practices in Europe in 1999. The authors find little evidence of the sort of market dynamics traditionally predicted by either proponents of critics or regulatory competition. Their research suggests that variations in the stringency of national systems of securities regulation across Europe is not a major factor in determining where and how European issuers access capital markets. Rather, European capital-raising practices seem to be heavily influenced by market forces that require issuers engaged in pan- European offerings to meet disclosure and due diligence standards modeled on and comparable to practices developed for private placements in the United States. The research also suggests that the growth of efficient trading linkages between European stock exchanges may diminish the need for European issuers to concern themselves with the legal requirements of other member states, a phenomenon not usually factored into discussions of regulatory competition in international securities markets.
Rethinking Securities Markets: The SEC Advisory Committee on Market Information and the Future of the National Market System
Joel Seligman, 57(2): 637 (Feb. 2002)
Since 1975 when the statutory basis for the current securities market structure was enacted, the markets have undergone a transformation made possible through the advancement of new technology. In particular, although the New York Stock Exchange remains the dominant national securities exchange, the development and increasing prominence of electronic communications networks and the declining role of competitive security quotes raise questions as to the continuing appropriateness of the old framework for disseminating market information. This article reviews the findings of the SEC Advisory Committee on Market Information, released September 2001, identifying the six principal conclusions. It explains how the committee's findings indicate the need for a more comprehensive study of equity securities market issues. Such a study should combine a detailed factual investigation of the present market system with an exploration of several key questions, including how quote competition should be conducted; how securities trading should be routed and executed; and which market centers should compete.
Framework for Control over Electronic Chattel PaperÂ-Compliance with UCC § 9–105
Working Group on Transferability of Electronic Financial Assets, a Joint Working Group of the Committee on Cyberspace Law and the Committee on the Uniform Commercial Code of the ABA Section of Business Law and The Open Group Security Forum, 61(2):721—744 (February 2006)
Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.
In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.
This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
Model Negotiated Covenants and Related Definitions
Committee on Trust Indentures and Indenture Trustees, ABA Section of Business Law, 61(4):1439-1540 (August 2006)
Freezeout Doctrine: Going Private at the Intersection of the Market and the Law
Faith Stevelman, 62(3): 775–912 (May 2007)
Delaware's fiduciary doctrine governing going private transactions by controlling shareholders is presently in disarray. Controllers generally select between single step cash-out mergers and tender offers followed by short-form mergers to do these freezeouts, and they are subject to very different equitable standards depending on the format selected by the controller. Furthermore, the courts' longstanding commitment to applying strict scrutiny in the adjudication of freezeouts is in tension with the popular disfavor towards private class-action litigation. This disarray threatens minorities' interests in freezeouts and capital market values more generally. This Article reviews the foundations of freezeout doctrine and proposes that the Entire Fairness doctrine should apply as the standard of review in all freezeouts unless prior to accepting the controller's offer the target company's independent directors conducted an auction or market check to ascertain if better offers were available.
Beyond the Basics: Seventy-five Defenses Securities Litigators Need to Know
Jonathan Eisenberg, 62(4): 1281-1394 (August 2007)
After questioning the value of securities class actions, which are largely unknown outside the United States, the author discusses 75 defenses that courts have used to dismiss securities claims. These defenses are typically raised at the motion to dismiss stage, and are important because securities class actions that survive motions to dismiss are usually settled rather than resolved on the merits. The article provides a template for analyzing the application of each defense to securities class action complaints, and then discusses each defense and references key authorities that practitioners can turn to for further analysis.
When Should Investor Reliance Be Presumed in Securities Class Actions?
Roberta S. Karmel, 63(1): 25–54 (November 2007)
Reasonable or justifiable reliance is one of the elements of a claim by a private party under section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). Section 18 of the Exchange Act has an even stricter reliance requirement, but proof of reliance is not required for a claim under section 11 of the Securities Act of 1933. This Article will discuss the basis for these discrepancies and inquire into whether traditional interpretations of the reliance requirement need to be re–examined. There are at least two possible reasons for such a re–examination at this time. First, the reliance requirement is frequently presumed in securities class actions based on the efficient capital market hypothesis ("ECMH"), but the ECMH has come to be seriously questioned in the academic literature. Second, high–powered decision makers in several recent reports have asserted that U.S. capital markets are becoming less competitive than overseas markets due, in part, to the high level of civil liability under the federal securities laws. These decision makers recommend that the uncertainties as to the elements of liability under Rule 10b–5 be resolved. Once such element is reliance because the issue of reliance in the certification of class actions has become an actively litigated area and the decisions in these cases are often crucial to the outcome of the litigation.
This Article argues that in developing the law of civil liability under Rule 10b–5, the courts should be guided by the doctrine that public companies impliedly represent that the statements they make in U.S. Securities and Exchange Commission ("SEC") filings and other required public utterances are truthful, and accordingly, they should be liable when materially false or misleading statements are made that cause damage to investors, whether or not investors can prove they read and relied upon such statements in purchasing or selling securities. Nevertheless, a plaintiff should be required to prove that such presumed reliance was reasonable. Such a theory of constructive reliance could be achieved through a reinterpretation of section 18 of the Exchange Act, through presumptions concerning reliance in Rule 10b–5 cases, or through legislation or possibly rule making by the SEC.
This Article will discuss the common law action for deceit, its inapplicability to issuer fraud in modern securities markets, and the defects of section 18 of the Exchange Act as a substitute for the common law. The development of Rule 10b–5 actions as an alternative cause of action and the requirements for reliance in Rule 10b–5 cases will also be covered. This Article then will discuss the ECMH, the theories of its supporters and detractors, as well as its use by the SEC in formulating securities disclosure policy. Finally, a revisionist view will be presented of how the fraud–on–the–market doctrine should be used in connection with proof of reliance in securities litigation.
No Registration Opinions Special Report
Subcommittee on Securities Law Opinions, Committee on Federal Regulation of Securities, ABA Section of Business Law, 63(1): 187–194 (November 2007)
Testing the Limits of NSMIA Preemption: State Authority to Determine the Validity of Covered Securities and to Regulate Disclosure
Robert N. Rapp and Fritz E. Berckmueller, 63(3): 809–854 (May 2008)
The National Securities Market Improvements Act of 1996 ("NSMIA") significantly limited the scope of state securities regulation under blue sky laws. NSMIA preempted state authority over the registration and qualification of securities offerings deemed "national" in character and established categories of "covered securities" for the purpose of setting those limits. NSMIA includes among "covered securities" those securities offered and sold pursuant to Rule 506 of Regulation D under the Securities Act of 1933. Recent state and federal courts have determined that the issuer must show the actual validity of, and not mere reliance on, the exemption and, just as important, have recognized that states may determine whether the exemption applies and exercise registration–related enforcement authority where the exemption is ruled invalid.
At the same time, NSMIA expressly preserves general state antifraud enforcement authority. Some courts have upheld the state's exercise of antifraud enforcement authority to prohibit specific fraudulent issuer disclosure documents within the state in an offering of NSMIA "covered securities."
These two sets of cases set up a confrontation between the historic mission of blue sky laws and the intended scope of NSMIA preemption that opens the door to reconsideration of the purpose of NSMIA. We call for a balance of federal and state regulatory authority that is consistent with the actual realignment of roles that NSMIA was designed to accomplish.
Negative Assurance in Securities Offerings (2008 Revision)
Report of the Subcommittee on Securities Law Opinions, Committee on Federal Regulation of Securities, ABA Section of Business Law, 64(2): 395-410 (February 2009)
Reforming the Regulation of Broker-Dealers and Investment Advisers
Arthur B. Laby, 65(2): 395–440 (February 2010)
A key component of financial regulatory reform is harmonizing the law governing broker-dealers and investment advisers. Historically, brokers charged commissions and were regulated under the Securities Exchange Act of 1934. Advisers charged asset-based fees and were subject to the Investment Advisers Act of 1940, which contains a special exclusion for brokers. In recent years, brokers have changed their compensation structure and many now market themselves as advisers, raising questions about whether they should be treated as such. The Obama Administration's 2009 white paper on regulatory reform and draft legislation call for a fiduciary duty to be imposed on brokers that provide advice. This Article explores the debate over regulating brokers and advisers, and makes four key claims. First, changes in brokers' compensation and marketing methods vitiate application of the broker-dealer exclusion and should subject brokers to the Advisers Act. Second, changes in the nature of brokerage, spurred by changes in technology, make the broker-dealer exclusion unsustainable and Congress should repeal it. The third claim is that imposing fiduciary duties on brokers is incompatible with their historical roles as dealers and underwriters. To resolve this tension, this Article suggests a compromise that enhances brokers' duties but does not hobble their ability to perform their traditional functions. Finally, regulating brokers as advisers would overburden the U.S. Securities and Exchange Commission. This Article offers alternatives to alleviate the strain.
Preemption as Micromanagement
Larry Ribstein, 65(3): 789–798 (May 2010)
Report of the Model First Lien/Second Lien Intercreditor Agreement Task Force
Committee on Commercial Finance, ABA Section of Business Law, 65(3): 809–884 (May 2010)
One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?
Leo E. Strine, Jr., 66(1): 1–26 (November 2010)
This essay poses the question of how corporations can be managed to promote long–term growth if their stockholders do not act and think with the long term in mind. To that end, the essay highlights the underlying facts regarding how short a time most stockholders, including institutional investors, hold their shares, the tension between the institutional investors' incentive to think short term and the best interests of not only the corporations in which these investors buy stock, but also with the best interests of the institutional investors' own clients, who are saving to pay for college for their kids and for their own retirement. Although the primary purpose of the essay is to highlight this fundamental and too long ignored tension in current corporate governance, the essay also identifies some modest moves to better align the incentives of institutional investors with those of the people whose money they manage, in an effort to better focus all those with power within the corporation—i.e., the directors, the managers, and the stockholders—on the creation of durable, long–term wealth through the sale of useful products and services.
Law of Private Placements (Non–Public Offerings) Not Entitled to Benefits of Safe Harbors—A Report
Committee on Federal Regulation of Securities, ABA Section of Business Law, 66(1): 85–124 (November 2010)
SEC Enforcement Actions and Issuer Litigation in the Context of a "Short Attack"
Charles F. Walker and Colin D. Forbes; 68(3): 687-738 (July 2013)
Issuers faced with a short attack—short selling of the issuer’s stock combined with the spread of negative rumors—may contemplate defensive strategies such as litigation and contacting government regulators, in addition to the investor and public relations efforts that are typically utilized in the wake of negative media coverage. Precedent calls for caution in these circumstances, as the record shows that the results of such strategies are mixed, with the SEC often turning its investigative focus to the issuer, and with costly litigation frequently resulting in compromise. This article begins with a discussion of the recent history of regulatory and legislative efforts to address concerns around short attacks and “naked” short selling. It then turns to a discussion of the SEC enforcement cases and private litigation relating to short attacks, and concludes that the SEC has appropriately brought enforcement cases only in clear-cut instances of fraud, while policing the margins through enforcement of the technical requirements of Regulation SHO. The article shows that the SEC enforcement record in this area, and the proof issues generally attendant to these cases, present important considerations for issuers who perceive themselves under siege in a short attack.
Corporate Short-Termism—In the Boardroom and in the Courtroom
Mark J. Roe, 68(4): 977-1006 (August 2013)
A long-held view in corporate circles has been that furious rapid trading in stock markets has been increasing in recent decades, justifying more judicial measures that shield managers and boards from shareholder influence, so that boards and managers are more free to pursue sensible long-term strategies in their investment and management policies. In this piece, I evaluate the evidence in favor of that view and find it insufficient to justify insulating boards from markets further: several under-analyzed aspects of the American economy and corporate structure are in play, each of which alone could trump a prescription for more board autonomy. The American economy has alternative institutions that mitigate, or reverse, much of any short-term tendencies in public markets; the evidence that the stock market is, net, short-termist is inconclusive; inside-the-corporation labor market difficulties would be exacerbated by further judicial insulation of boards from markets; other institutions are better positioned to deal with any short-term horizons in business than corporate law courts; and the widely held view that short-term trading has increased dramatically in recent decades may over-interpret the data, as the holding duration for major stockholders, such as mutual funds like Fidelity and Vanguard, and major pension funds, does not seem to have shortened and there is unnoticed evidence that the pay duration of the CEO and other executives is shorter than the average stockholders’ duration, calling into question where the structural sources of potential short-termism lie. Overall, system-wide short-termism in public firms is something to watch, but not something that today should affect corporate lawmaking.
Fiduciary Society Unleashed: The Road Ahead for the Financial Sector
Edward J. Waitzer and Douglas Sarro, 69(4): 1081-1116 (August 2014)
Informational asymmetries, misaligned incentives and artificially elongated chains of intermediation have created a disconnect between the financial sector and the “real economy” that is detrimental to the public interest. Courts and regulators are increasingly intervening to break the cycle. We argue that fiduciary law offers a conceptual framework both for understanding and responding to this trend, and that the financial sector, rather than waiting for this trend to develop and reacting to new rules in a piecemeal way, should be proactive and try to shape the way in which this trend develops. We describe some elements of what such an approach might look like, and consider how regulators and political institutions can encourage financial institutions to adopt this approach, and in so doing support a broader transition to a more sustainable economy.
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
No Registration Opinions (2015 Update)
Report of the Subcommittee on Securities Law Opinions, Federal Regulation of Securities Committee, ABA Business Law Section; 71(1): 129-138 (Winter 2015/2016)
Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States
Leo E. Strine, Jr., 71(4): 1081-1112 (Fall 2016)
These days it has become fashionable to talk about whether the incentive system for the governance of American corporations optimally encourages long-term investment, sustainable policies, and therefore creates the most long-term economic and social benefit for American workers and investors. Many have come to the conclusion that the answer to that question is no. As these commentators note, the investment horizon of the ultimate source of most equity capital—human beings who must give their money to institutional investors to save for retirement and college for their kids—is long. That horizon is much more aligned with what it takes to run a real business than that of the direct stockholders, who are money managers and are under strong pressure to deliver immediate returns at all times. Americans want corporations that are focused on sustainable wealth and job creation. But there is too little talk accompanied by a specific policy agenda to address that incentive system.
This Article proposes a genuine, realistic agenda that would better promote a sustainable, long-term commitment to economic growth in the United States. This agenda should not divide Americans along party lines. Indeed, most of the elements have substantial bipartisan support. Nor does this agenda involve freeing corporate managers from accountability to investors for delivering profitable returns. Rather, it makes all those who represent human investors more accountable, but for delivering on what most counts for ordinary investors, which is the creation of durable wealth by socially responsible means.
The fundamental elements of this strategy to promote long-term American competitiveness include: (i) tax policy that discourages counterproductive behavior and encourages investment and work; (ii) investment policies to revitalize our infrastructure, address climate change, create jobs, and close our deficit; (iii) reforming the incentives of and enhancing the fiduciary accountability of institutional investors; (iv) reducing the focus on quarterly earnings estimates and improving the quality of information provided to investors; and (v) an American commitment to an international level playing field to reduce incentives to offshore jobs, erode the social safety net, and pollute the planet.
The Promise of Unfavorable Research: Ramifications of Regulations Separating Research and Investment Banking for IPO Issuers and Investors
Benjamin J. Catalano; 72(1): 31-60 (Winter 2016/2017)
The trend in Securities and Exchange Commission and Financial Industry Regulatory Authority rulemaking and enforcement to insulate research from investment banking influence has led to the removal of research analysts from the underwriting process with adverse consequences for new issuers and their investors. The approach conflicts with the congressional objective under the Jumpstart Our Business Startups (JOBS) Act to incorporate research fully in public offerings for emerging growth companies, which now comprise the vast majority of IPO issuers. Faced with these competing objectives, broker-dealers should have written policies and procedures that are carefully crafted to service their underwriting and investor clients appropriately and to take advantage of the JOBS Act privileges with respect to research.
A Case for Eliminating Quarterly Periodic Reporting: Addressing the Malady of Short-Termism in U.S. Markets with Real Medicine
W. Randy Eaddy, 74(2) 387-416 (Spring 2019)
The author maintains that “short-termism” is a serious malady for which the only effective remedy is (1) elimination of quarterly periodic reporting on Form 10-Q, and the companion disclosure regime of quarterly earnings releases and conference calls, (2) conversion to annual-only periodic reporting on Form 10-K, coupled with a new annual earnings guidance requirement, and (3) retention of current interim disclosure of select material events on Form 8-K. The author reviews how the current quarterly disclosure regimes lead inevitably to short-termism behaviors, and are temptations to other problematic conduct, by corporate actors and market participants. The author contends that the proposed disclosure regime would reduce substantially such behavior and temptations, without compromising the quality of disclosures, protection of investors, or effectiveness of the capital markets system. The author argues that only such a fundamental change from the short-term timetable of the current disclosure regimes can curb short-termism, promote longer term and more strategic focus by corporate actors, and lead analysts, investors, and other market participants to focus on longer-term value propositions.
Simple Insolvency Detection for Publicly Traded Firms
J.B. Heaton, 74(3) 723-734 (Summer 2019)
This article addresses current limitations of financial-market-based solvency tests by proposing a simple balance-sheet solvency test for publicly traded firms. This test is derived from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation. The solvency test requires only the assumption that the market value of assets equals the sum of the market value of the firm’s debt plus the market value of the firm’s equity. The solvency test is a generated upper bound on the total amount of debt the firm can have and still be solvent or, alternatively, the minimum amount of stock-market capitalization the firm must have if it is solvent at current debt prices. The virtue of the method—apart from its ease of implementation—is that it makes possible the detection of balance-sheet insolvent firms notwithstanding the possibility that not all of the firm’s liabilities—including hard-to-quantify contingent liabilities—can be identified. As a result, the method allows for the detection of balance-sheet insolvent firms that otherwise might escape detection. The method proposed here can identify insolvent firms that should be retaining assets and not paying them out to shareholders as dividends or repurchases, identify stocks that brokers and investment advisers should treat as out-of-the-money call options that may be unsuitable investments, and can help auditors identify publicly traded firms that are candidates for going-concern qualifications and other disclosures.
Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets
Jonathan Macey and Joshua Mitts, 74(4): 1015-1064 (Fall 2019)
In this article, we make several contributions to the literature on appraisal rights and similar cases in which courts assign values to a company’s shares in the litigation context. First, we applaud the recent trend in Delaware cases to consider the market prices of the stock of the company being valued if that stock trades in an efficient market, and we defend this market-oriented methodology against claims that recent discoveries in behavioral finance indicate that share prices are unreliable due to various cognitive biases. Next, we propose that the framework and methodology for utilizing market prices be clarified. We maintain that courts should look at the market price of the securities of a target company whose shares are being valued, unadjusted for the news of the merger, rather than at the deal price that was reached by the parties in the transaction.
Development of Legal Opinion Practice as Reflected in The Business Lawyer
Sylvia Fung Chin, Arthur Norman Field, Donald W. Glazer, and Stanley Keller, 75(3): 2041-2052 (Summer 2020)
As reflected in the reports published over the years in The Business Lawyer, third-party legal opinion practice has developed significantly during The Business Lawyer’s seventy-five years. That development was prompted by a seminal article on legal opinions published in 1973 in The Business Lawyer. Since then, The Business Lawyer has published numerous reports on legal opinion practice by the ABA Business Law Section’s Legal Opinions Committee and other bar groups, as well as many articles on legal opinions. Four participants in the development of legal opinion practice describe that development in this article and predict what might be expected going forward.
The Treatment of Derivatives Under the SEC’s Net Capital Rule
Michael P. Jamroz, 76(1): 183-210 (Winter 2020-2021)
Every broker or dealer conducting a general securities business registered with the Securities and Exchange Commission (Commission) must comply with SEC Rule 15c3-1, the Net Capital Rule. The Net Capital Rule is designed to ensure that broker-dealers will have adequate liquid assets to meet their obligations to investors and liabilities to other creditors. The rule is complex and specifically addresses the liquidity, market, and counterparty credit risks associated with the proprietary positions of the broker-dealer.