Securities Lawyers Research Articles

Highlights of the new PRC securities law

Purpose To introduce the Securities Law of the People's Republic of China (the “Securities Law 2019”) revised on 28 December 2019, and provide a detailed analysis on its key implications to the securities regulatory regime and market activities, especially securities issuance and trading activities in China. Design/methodology/approach This article starts from a historical overview of the Securities Law and its several revisions and amendments, highlights the notable core revisions in the Securities Law 2019, analyzes the key legal and regulatory impacts to the securities-related activities and market players, and finally, provides an outlook to the future developments of securities regulatory regime in conformity with the Securities Law 2019. Findings This article concludes that the revisions made to the Securities Law 2019 cover a broad range of issues including the issuance and trading of securities, acquisition of a listed company, information disclosure, securities registration and settlement, etc. Such revisions to the Securities Law will lead to far-reaching and profound implications on the securities regulatory system and industry practice in China. Practical implications The Securities Law 2019 attracts broad attention from securities market players as well as relevant professionals of the industry, including securities lawyers. As this is a novel and hot topic within the industry, it is important for securities lawyers to keep on track. Originality/value High-level guidance from experienced lawyers in the Capital Markets and Financial Regulation practices.

Implicit Communications and Enforcement of Corporate Disclosure Regulation

The communication of non-public information in private meetings between corporate officials and financial analysts presents a distinctive regulatory challenge. One reason is that there typically is no record of what transpires in a private meeting. A second is that information may be communicated both explicitly and through implicit communication -- qualitative statements, tone, and non-verbal cues. The private meeting context is particularly conducive to the use of implicit communication. The SEC adopted Regulation Fair Disclosure (Reg FD) specifically to address selective disclosures in private meetings, but subsequently a federal court rejected the SEC’s attempt to impose liability for optimistic statements by a corporate official in private meetings with investors that contrasted with the negative tone of the company’s public statements. We provide empirical evidence examining the information content of analyst reports before and after the court’s ruling and suggesting that selective disclosure from managers to financial analysts increased significantly. To explore the mechanism responsible for this change, we survey securities lawyers who advise corporate officials regarding Reg FD compliance. Our survey responses indicate that this increase in disclosure is most likely due to an increase in implicit communication. Our results highlight the challenges associated with enforcing corporate disclosure regulation in the context of implicit communication.

Envy, Jealousy and Insider Trading: The Case of Martha Stewart

Envy, Jealousy and Insider Trading: The Case of Martha Stewart

SEC reporting obligations for insiders and large traders under Section 13 and Section 16 of the Exchange Act

Purpose The purpose of this paper is to provide investment advisers, broker dealers, individual investors and other securities firms with a current and detailed summary of the reporting regime under Sections 13 and 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) and guidance on how to comply with the disclosure requirements of the U.S. Securities and Exchange Commission (the “SEC”) on Schedule 13D, Schedule 13G, Form 13F, Form 13H and Forms 3, 4 and 5. Design/methodology/approach The approach of this paper discusses the transactions or beneficial ownership interests in securities that trigger a reporting requirement under Section 13 and/or Section 16 of the Exchange Act, identifies the person or persons that have the obligation to file reports with the SEC, details the information required to be disclosed in the publicly available reports, and explains certain trading restrictions imposed on reporting persons as well as the potential adverse consequences of filing late or failing to make the requisite disclosures to the SEC. Findings The SEC continues to provide updated guidance on the disclosure requirements under Sections 13 and 16 of the Exchange Act, which individual investors and securities firms – largely insiders – must take into account when filing any new or amended reports on Schedule 13D, Schedule 13G, Form 13F, Form 13H and Forms 3, 4 and 5. Originality/value This article provides expert analysis and guidance from experienced securities lawyers.

SEC sues asset managers for using untested, error-filled quantitative investment models

PurposeTo explain actions the US Securities and Exchange Commission (SEC) brought on August 27, 2018, against a group of affiliated investment advisers and broker-dealers for what the SEC considered misleading and insufficient representations and disclosures, insufficient compliance policies and procedures, and insufficient research and oversight concerning the use of faulty quantitative models to manage certain client accounts.Design/methodology/approachExplains the SEC’s findings concerning the advisers’ and broker-dealers’ failure to confirm that certain models worked as intended, to disclose the risks associated with the use of those models, to disclose the role of a research analyst in developing the models, to disclose the use of volatility overlays along with the associated risks, to determine whether a fund’s holdings were sufficient to support a consistent dividend payout without a return of capital, and to take sufficient steps to confirm the advertised performance of another investment manager whose products they were marketing. Provides insight into the SEC’s position and offers key takeaways.FindingsThese cases are significant for advisers who use quantitative models to implement their investment strategies in the management of client accounts and signal the SEC’s continued focus on investment advisers’ compliance with disclosure obligations to discretionary account investors.Practical implicationsEach manager should consider its own facts and circumstances, and should consult with counsel, in assessing how and to what extent to incorporate the SEC’s conclusions in crafting disclosure and other communications with investors on matters such as adequate representations, testing and validation of models, disclosure of errors, and verifying performance claims.Originality/valuePractical guidance from experienced securities lawyers.

SEC issues landmark order rejecting Nasdaq and NYSE Arca market data fee increases

PurposeTo explain an October 16, 2018 US Securities and Exchange Commission order that unanimously upheld a SIFMA challenge to fee increases for “depth-of-book” market data filed by Nasdaq and NYSE Arca and the SEC’s simultaneous remanding of over 400 market data fee and other filings back to the exchanges for consideration under the standards set out in the order.Design/methodology/approachExplains the criteria for fee increases under the Exchange Act, the SEC’s historic routine approval of exchanges’ proposed fee increases, the SEC’s challenge to two recent market data filings, and the SEC’s remanding of 400 additional market data fee filings challenged by SIFMA to the exchanges and the National Market System (NMS) for reconsideration. Analyzes and discusses the SEC’s order.FindingsThe SECs’ SIFMA order appears to raise the bar significantly for what exchanges must show to justify fee increases.More broadly, all five SEC Commissioners (of both parties) appear to be rethinking the role of for-profit exchanges in the regulatory structure.These orders have the potential to rewrite the regulation of market data, other exchange fees, and potentially the relationship between the exchanges and other market participants, for the entire securities industry.Originality/valuePractical guidance from experienced securities lawyers.

US SEC report calls for better internal accounting controls for cyber-related threats

PurposeTo summarize and explain the US Securities and Exchange Commission’s (Commission) recent report of investigation cautioning public companies to consider cyber-related threats when designing and implementing internal accounting controls.Design/methodology/approachExplains that the Commission’s report arose out of a Commission enforcement investigation into the internal accounting controls of nine unidentified public companies that were victims of email scams, explains that the Commission issued the report to emphasize that cybersecurity remains a high priority for the Commission and the report should serve as a reminder that all public companies need to consider cyber-related threats when devising and maintaining internal accounting controls and provides practical considerations for public companies to consider in light of the Commission’s report.FindingsPublic companies should assume that the Commission is actively monitoring all areas related to cybersecurity, including corporate disclosures of cyber-related incidents and also whether companies have established policies, procedures, and internal controls in place to ensure cyber-related incidents are prevented. Given that assumption, public companies should take prompt steps to assess and, if appropriate, improve internal accounting controls, disclosure controls, and cyber-related policies and procedures to address the risk of cyber-related incidents.Originality/valuePractical guidance from experienced securities lawyers.

SEC whistleblower retaliation – and the federal securities laws – after Digital Realty

PurposeThe purpose of this paper is to analyze the Supreme Court’s recent decision in Digital Realty Trust, Inc v. Somers and its significance for whistleblower retaliation remedies and securities law interpretation generally.Design methodology approachThe authors review the statutory, regulatory and decisional history of the anti-whistleblower retaliation remedies of the Sarbanes–Oxley Act and the Dodd–Frank Act; how they were seen by the US Securities and Exchange Commission (SEC) and most courts to be in conflict, and how they were ultimately harmonized by the Supreme Court in Digital Realty.FindingsIn Digital Realty, the Supreme Court ruled against the SEC and the leading Courts of Appeal and established that only one who reports securities law violations to the SEC can sue in federal court under the Dodd–Frank Act; all others are limited to the lesser remedies provided by the Sarbanes–Oxley Act. This simple conclusion raises a number of unresolved questions, which the authors identify and discuss. Also, the Supreme Court unanimously continued the pattern of federal securities laws decisions marked by a close reading of the text and a desire to limit private litigants’ access to the federal courts.Originality valueThis paper provides valuable information and insights about the legal protections for SEC whistleblowers from experienced securities lawyers and more generally on the principles that appear to guide securities law decisions in the Supreme Court.

Securities Law Expertise and Corporate Disclosure

ABSTRACTWe examine whether securities lawyers involved in SEC comment letter inquiries act as client advocates by resisting disclosure changes or as gatekeepers by encouraging disclosure transparency. Consistent with an advocacy role, we find that securities lawyers' involvement in SEC comment letters is associated with resisting disclosure inquiries through redacting information from filings and issuing fewer amendments to previous disclosures. Our evidence also supports the view that the role of securities lawyers extends beyond the specific inquiry; their involvement is associated with improved readability and more cautionary language in the subsequent 10-K, and fewer future restatements and comment letters. Last, we find that securities lawyers serve more of an advocacy role when proprietary costs are high and when the inquiry involves a possible amendment, but more of a gatekeeper role when an inquiry is more complex.JEL Classifications: M41

Five crypto-securities trends that spell more lawsuits in 2018

Purpose The purpose of this paper is to identify trends in the unfolding wave of crypto-securities cases targeting initial coin offerings and discuss the reasons why these suits will likely proliferate. Design/methodology/approach The authors of this paper, all attorneys, conducted a review of 13 crypto-securities cases filed as of February 8, 2018. High-level common themes and trends were identified based on that review. Findings This paper concludes that, for multiple reasons, the number of crypto-securities suits is likely to rise in 2018. Originality/value This paper contains in-depth analysis about trends in crypto-securities suits from experienced securities lawyers.

SEC staff issues guidance on Rule 14a-8 calling for board involvement in evaluating shareholder proposals

PurposeThis paper examines a legal bulletin issued by the staff of the Securities and Exchange Commission (SEC) in November 2017 that provides significant new guidance to SEC-reporting companies on the application of the “ordinary business” and “economic relevance” exceptions in Rule 14a-8 under the Securities Exchange Act of 1934. Rule 14a-8 governs an SEC-reporting company’s obligation to include shareholder proposals in its proxy materials for a shareholder meeting.Design/methodology/approachThis paper provides in-depth analysis of the new interpretive guidance against the background of continuing controversy between companies and shareholder-proponents over the bases on which companies should be permitted to exclude from their proxy materials proposals that proponents believe raise social, ethical or other policy issues that are appropriate for shareholder action.FindingsIn acting on a company’s request to exclude a proposal, the SEC staff must make difficult judgments regarding the connection between policy issues reflected in the proposal and the company’s business operations, which the company’s directors and officers seek to conduct free of inappropriate shareholder oversight. In the new guidance, the staff calls for assistance in making these judgments by soliciting greater board-level involvement in the exclusion determination and encouraging the company in its no-action submission to discuss the board’s analysis and decision-making process. Greater board participation should encourage a more probing assessment of the considerations weighed in these determinations.Originality/valueThis paper provides expert guidance on a major new SEC disclosure requirement from experienced securities lawyers.

SEC shortens standard settlement cycle to T+2

PurposeTo describe the steps taken by the SEC to shorten the standard settlement cycle for most broker-dealer transactions from three business days to two business days after the trade date.Design/methodology/approachProvides insight into a recent area of focus for SEC regulators and describe the SEC’s efforts to improve the efficiency of and reduce risks associated with the US national clearance and settlement system.FindingsIndustry participants must continue to work toward an migration date from T+3 to T+2 on September 5, 2017. In addition, numerous corresponding rule changes have been made or are expected across other regulatory regimes, including other federal regulators and self-regulatory organizations. Industry participants should monitor communications from these organizations closely for guidance about regulatory updates related to T+2.Originality/valuePractical regulatory guidance regarding SEC operational requirements for the US national clearance and settlement system and the impact on related SEC regulations from experienced securities lawyers.

Cross border master-feeder arrangements: SEC staff slightly expands utility of offshore feeders for global investment management firms, but tax and other challenges remain

PurposeTo analyze the recent SEC no-action relief allowing a non-US investment company to invest as a feeder fund in a US registered open-end management investment company without complying with all of the conditions of Section 12(d)(1)(E) of the Investment Company Act of 1940.Design/methodology/approachThis article discusses the various conditions that a non-US investment company investing as a foreign feeder in a US registered open-end management investment company must satisfy in order to avoid complying with certain provisions of Section 12(d)(1)(E) of the Investment Company Act of 1940. In addition, the article analyzes certain potential tax and regulatory challenges facing firms seeking to rely on the relief.FindingsThis article concludes that the SEC no-action relief is an incremental step in reducing barriers to global distribution of US registered funds and may marginally increase the use of cross-border master-feeder arrangements as contemplated by the no-action letter. Nevertheless, this article cautions that significant impediments to global distribution of US registered funds remain, including tax withholding and non-US law issues.Originality/valueThis article contains valuable information about the regulatory impediments to global distribution of US registered funds, as well as learned assessments of the impact of recent developments in this space by experienced securities lawyers.

Are your customer accounts in order? – SEC announces sweep of broker-dealers and implementation of the customer protection rule initiative

PurposeTo explain the Customer Protection Rule Initiative announced by the Securities and Exchange Commission (SEC) and offer practical guidance for complying with Rule 15c3-3 under the Securities Exchange Act of 1934.Design/methodology/approachThis article discusses Rule 15c3-3 under the Securities Exchange Act of 1934, related interpretative guidance, and the Customer Protection Rule Initiative announced in June 2016 by the SEC.FindingsThis article concludes that broker-dealers should take advantage of the Customer Protection Rule Initiative’s self-reporting mechanism and use this time to review their current account arrangements with banks, existing internal policies and procedures, and account documentation.Originality/valueThis article contains valuable information about the SEC’s Customer Protection Rule Initiative and practical compliance guidance from experienced securities lawyers.

New compliance guidance by SEC staff signals increased scrutiny of non-GAAP financial measures

Purpose This article examines compliance and disclosure interpretations issued by the staff of the Securities and Exchange Commission in May 2016 that provide guidance to SEC-reporting companies on how they can use financial measures not prepared in accordance with generally accepted accounting principles in a manner that complies with SEC rules governing the presentation of non-GAAP measures in SEC filings and other public communications. Design/methodology/approach This article provides an in-depth analysis of the new interpretive guidance in the context of the increasing use of non-GAAP financial measures by SEC-reporting companies and the SEC’s concern that some companies have been using non-GAAP measures inappropriately to present a materially different picture of their operating performance than investors can discern from financial measures prepared in accordance with GAAP. Findings Although the appropriate use of non-GAAP financial measures can enhance investor understanding of a company’s business and operating results, a relatively permissive SEC attitude towards the use of non-GAAP measures in recent years has emboldened some companies to increase their reliance on non-GAAP measures in a manner the SEC views as inconsistent with its rules. The SEC staff’s new guidance signals a renewed focus by the SEC on compliance with its requirements concerning the nature of permissible non-GAAP measures and the ways in which companies should present those measures. Originality/value This article provides expert guidance on a major new SEC disclosure requirement from experienced securities lawyers.

MSRB and FINRA issue joint notice cautioning broker-dealers and municipal advisors about bank loans

Purpose To alert lenders, broker-dealers and municipal advisors to a joint regulatory notice from the Municipal Securities Rulemaking Board (“MSRB”) and the Financial Industry Regulatory Authority (“FINRA”) regarding direct purchase or “bank loan” transactions. Design/methodology/approach Explains the MSRB and FINRA notice, why the notice was issued, what lenders should know about the notice, what broker-dealers and municipal advisors should know about the notice, and what MSRB rules could apply to bank loans. Findings Firms should determine whether state and local government obligations acquired through bank loan transactions constitute municipal securities for federal securities law purposes. Originality/value Review of a recently issued regulatory notice by experienced municipal securities lawyers.

FINRA publishes guidance on research conflict of interest rules

Purpose To explain recent guidance released by the Financial Industry Regulatory Authority (FINRA) regarding research analyst conflicts of interest that arise during the underwriter selection process. Design/methodology/approach The article discusses the risks associated with different communications between research analysts and issuers during the three phases of the underwriter selection process: the pre-IPO period; the solicitation period; and the post-mandate period. Findings While many questions remain, the FINRA guidance provides valuable insight to firms regarding the types of communications between research analysts and issuers that are permitted during different periods in the solicitation process. The risk levels associated with different types of communications during those time periods range from low to high to “unmanageable”. The article provides practical guidance on what research analysts can say and do during the different periods. Practical implications Broker-dealers should evaluate their policies and procedures to ensure compliance with the new FINRA guidelines. Originality value Practical guidance from experienced securities lawyers who are on the front lines in dealing with these issues.

SEC approves long-anticipated FINRA research rules

Purpose To analyze the changes to the FINRA equity research rules and evaluate concerns that may be important to and have an impact on equity research activities following the effective date. Design/methodology/approach This article provides an overview of the changes reflected in FINRA Rule 2241 pertaining to equity research analysts and research reports, as well as changes to licensing requirements for equity research analysts. It highlights potential issues for firms and provides some commentary on how these issues should be considered in light of FINRA’s articulated position and assurances FINRA has given to the SEC. Findings This article concludes that firms should anticipate these changes and begin a comprehensive review of research policies and procedures, the personnel who prepare research reports and the scope of their research products so as to be compliant with Rule 2241 from its effective date. Firms should also begin an investigation of technologies used to gather, produce and disseminate research and required disclosures to ensure they meet the new requirements when they are effective. Originality/value This article provides insight into the new FINRA Rule 2241 and practical guidance from experienced securities lawyers.

SEC adopts rule to implement Dodd-Frank CEO pay ratio disclosure requirement

Purpose This article examines the rule issued by the Securities and Exchange Commission in August 2015 that requires most SEC-reporting companies to disclose annually the ratio of the annual total compensation of their chief executive officer to the median of the annual total compensation of their employees other than the CEO. Design/methodology/approach This article provides an in-depth analysis of the operation of the controversial pay ratio disclosure rule against the backdrop of concerns expressed by many commenters on the rule proposal, as well as by the two Commissioners who dissented from adoption of the rule, that the disclosure will not provide meaningful information to investors and will be excessively costly and burdensome for companies to produce. Findings The SEC fashioned the final pay ratio disclosure rule with a vaguely defined statutory purpose to guide it and a heavy volume of comments on its rule proposal that urged widely disparate approaches to implementation. In overhauling the proposed rule, the SEC sought to satisfy its mandate under the Dodd-Frank Act while providing companies with flexibility in implementing the new rule that it believes will reduce compliance costs and burdens. Originality/value This article provides expert guidance on a major new SEC disclosure requirement from experienced securities lawyers.

SEC enforcement actions getting up close and personal

Purpose To alert public company management and directors to several recent SEC enforcement actions involving executives and other senior personnel arising out of securities law violations. Design/methodology/approach Reviews a series of enforcement actions against four chief executive officers, four chief financial officers, an audit committee chair, and one outside auditor (BDO USA LLC) and five of its partners arising out of securities law violations by four different corporations (MusclePharm Corporation, Bankrate, Inc., KIT Digital, Inc. and General Employment Enterprises, Inc.). Each of the actions involved financial reporting and disclosure violations. Also highlights the need for directors and senior management to maintain a sharp focus on their company’s controls and disclosure practices. Findings The SEC’S actions may portend renewed determination by the agency to hold executives and directors, as well as outside professionals, accountable for securities fraud and disclosure violations committed by corporations. Originality/value Practical guidance from experienced securities lawyers.