There have been a number of weird news stories this week, so the Bloomberg terminal data breach scandal may not be getting enough time in the limelight. Recently, it has come to light that employees at Bloomberg have access to at least some information regarding users' search habits. Bloomberg currently has more than 315,000 terminals at client offices, mostly financial institutions, but also law firms. (Our campus also has some.) From these terminals, users can do a vast array of things, from researching specific companies to chatting to sending emails to making financial trades. Think of it like Westlaw or Lexis -- you can do a thousand things on those websites, but you mainly read law review articles, cases and statutes. Bloomberg terminals are very expensive ($20k/year) and also not committed to being user-friendly. Though Westlaw and Lexis gave up dedicated terminals decades ago and went from dial-up access to a web-friendly interface, Bloomberg has remained pretty hard to learn how to use, which may be why users are so hesitant to give it up after mastering it.
This week, Bloomberg is trying allay its clients' fears that journalists could see some data, but not important data (chatting, emailing, trading, specific research), and Wall Street firms are trying to get more commitments from Bloomberg as to what was accessible and what will be accessible going forward. But what interests me is what I'm not seeing anywhere -- what does the SEC think is important here?
Back in the day, and I assume now, lots of people devoted a lot of time to try to collect information on companies that might be engaged in M&A activity. A common legend around my law firm was that individuals would pose as messengers to go to the conference room floor and peruse the sign-in book to see what sorts of people were in the same conference room. I'm sure that was an example of an amateurish effort. A famous insider trading case involved the guy who worked for the financial printer trading on information he gleaned from reading documents there. I don't think you have to be a mystery novelist to come up with a scenario whereby a journalist at Bloomberg sees which (M&A lawyer) users are logging on and what sorts of things they are looking at and cobbles together insider information. The EIC of Bloomberg, Matthew Winkler, says that no one could access specific securities information, but could see aggregate information "akin to being able to see how many times someone used Microsoft Word vs. Excel." What about aggregate information such as a steep increase in users accessing company information on Company X? (N.B.: Bloomberg offers a service called Bloomberg Law, which is separate from the terminals that are at the heart of the breach this week. However, many law firms have Bloomberg business terminals.)
And now that we realize that Bloomberg could see that individual users were logging on and off (or not) of their terminals, is anyone interested in what folks at Westlaw or Lexis see? I would think that a sudden unease now exists for any research service that gives us a user logon associated with an individual's name and employer, whether that's a law firm or an investment bank.
The titular questions have been swirling in the back of my head for the past month or so. Spoiler alert: I don't have the answer. But Jeff Schwartz' post in the CLS Blue Sky blog on the SEC Advisory Committee on Small and Emerging Companies' proposal to create a separate market for small and emerging companies, open only to accredited investors--more or less a public SecondMarket/SharesPost--has me asking it again.
This strikes me, unlike Jeff, at first blush as a bad idea, but let's ignore the merits of the proposal and focus on one of its premises. One of the arguments the Committee makes in favor of it is that "providing a satisfactory trading venue" for these companies might encourage IPOs of their securities.
First question: Really? Isn't it just as likely that, if a robust market exists for these companies, they're less likely to go public? Isn't obtaining liquidity one big reason for going public in the first place?
Second question: How many is the right number of IPOs, anyway? The WSJ told me yesterday IPOs are set to raise the most cash since 2007. Jay Ritter argued in a recent paper that IPOs have dried up not because of heavy-handed government regulation but because times have changed. Now getting big fast is the way to go, and going public and being a small independent company isn't as attractive to a young firm being acquired by a bigger player.
As Ritter writes, "If the reason that many small companies are not going public is because they will be more profitable as part of a larger organization, then policies designed to encourage companies to remain small and independent have the potential to harm the economy, rather than boost it." Ritter's prescriptions to help IPOs are to encourage auctions over bookbuilding (here's yet more evidence that the underwriter spread is too big), discourage class action lawsuits, and reform the copyright and patent system.
Ritter closes with: "I do not know what the optimal level of IPO activity is in the United States or any other country, nor do I think that it should necessarily be the same now as it one was."
Right now I'm with him.
Just out today, here's a link to one of my projects for my semester "off": Vanderbilt Law Review asked me to contribute to an online symposium offering advice for the SEC in its JOBS Act rulemaking. There's no abstract, but here's my opener:
Watch enough late night television and you’ll see advertisements for weight-loss elixirs, hair restoratives, and cures for ailments you never dreamed existed. Imagine, if you will, yet another huckster, this one touting PrivateDeal, a “never-before-available investment opportunity, the chance of a lifetime! Get in on the ground floor of a start-up boasting triple-digit growth!” The PrivateDeal hawker goes on to declare: “This investment was previously only available to the ultrarich, but now, thanks to recent developments in the law, it can be yours!”
Jim, an intrigued investor, calls the 800 number on the bottom of his screen, expecting to encounter an operator ready to take his credit card information. Instead, he gets an agent who starts peppering him with questions about his income and net worth. Gradually it dawns on Jim that he may not be able to invest in PrivateDeal after all. Indeed, five minutes into the conversation, the agent confirms that he is not qualified to invest.
“But. . .why. . .” Jim begins to splutter.
“Sir,” the agent explains patiently—Jim senses she has started this speech many times already tonight—“The fine print in the ad specifies that only accredited investors are eligible to buy shares in PrivateDeal.”
To which Jim responds: “Well, what’s an accredited investor?”
Welcome to post-JOBS Act private investing.
As you can tell, I had fun with the piece--my opening might (or might not) have been the product of bad late night television that I may (or may not) have been watching while up feeding my small one. I reveled in the freedom of the hybrid blogpost/essay form. I've done a few of these short online pieces for law reviews (here on SPACs for the Harvard Business Law Review), here for the Texas Law Review to respond to a Brian Galle article, and I've found each to be quite satisfying. I welcome the opportunity to produce timely, easy-to-digest morsels of scholarship.
Let me know what you think of the piece, and head over to Vanderbilt Law Review's website to check out offerings from my friends Andrew Schwartz of Colorado Law and Doug Ellenoff, a practitioner whom I met in the course of my SPAC research.
We haven't had a download list in a while; let's rectify that with the SSRN 60 days securities law article ranking. Your mileage may, of course, vary, but here's what's intriguing that crowd these days:
|1||376||The Securitization of Patents
Villanova University School of Law,
Date posted to database: March 3, 2013
Last Revised: April 18, 2013
|2||285||The New Investor
Tom C. W. Lin,
University of Florida - Fredric G. Levin College of Law,
Date posted to database: March 3, 2013
Last Revised: March 13, 2013
|3||265||The Fiduciary Obligations of Financial Advisors Under the Law of Agency
Robert H. Sitkoff,
Harvard Law School,
Date posted to database: March 19, 2013
Last Revised: March 20, 2013
|4||249||The Supercharged IPO
Victor Fleischer, Nancy C. Staudt,
University of Colorado at Boulder - School of Law, University of Southern California - Law School,
Date posted to database: March 21, 2013
Last Revised: April 4, 2013
|5||189||Corporate Short-Termism - In the Boardroom and in the Courtroom
Mark J. Roe,
Harvard Law School,
Date posted to database: March 27, 2013
Last Revised: April 29, 2013
|6||96||The Importance of Cost-Benefit Analysis in Financial Regulation
Paul Rose, Christopher J. Walker,
Ohio State University (OSU) - Michael E. Moritz College of Law, Ohio State University (OSU) - Michael E. Moritz College of Law,
Date posted to database: March 11, 2013
Last Revised: April 3, 2013
|7||94||The New Market in Debt Governance
Vanderbilt University - Law School,
Date posted to database: March 1, 2013
Last Revised: March 14, 2013
|8||90||The JOBS Act: Rule 506, Crowdfunding, and the Balance between Efficient Capital Formation and Investor Protection
Daniel H. Jeng,
Boston University School of Law,
Date posted to database: March 25, 2013
Last Revised: March 25, 2013
New York Law School,
Date posted to database: April 8, 2013
Last Revised: April 8, 2013
|10||82||The Separation of Investments and Management
University of Virginia School of Law,
Date posted to database: March 29, 2013
Last Revised: April 8, 2013
a whistle-blower program is a privatization approach, not unlike hiring a private company to run a prison. But for the S.E.C., it is law enforcement that is being privatized. Rather than being able to take aim at particularly worrisome corners of the securities markets, the program leaves the S.E.C. beholden to tippees. Moreover, if Congress believes whistle-blowers, rather than the agency, are doing the work, it will have yet another justification for placing tight limits on the agency’s budget.
Do check it out, and let me know your thoughts, either down below or thataway.
Two summers ago, a group of well-known law professors (no Glommers) submitted a proposal to the SEC to require disclosure of political contributions by Exchange Act filers. The arguments for new rulemaking were valid and persuasive: investors are increasingly interested in the political contributions corporations make; even a diligent investor would have a difficult time finding this information independently; many corporations voluntarily disclose such information; and disclosure rules have historically evolved to require disclosure in various areas.
Wedneady, the NYT ominously declared that "S.E.C. officials have indicated that they could propose a new disclosure rule by the end of April, setting up a major battle with business groups that oppose the proposal and are preparing for a fierce counterattack if the agency’s staff moves ahead." That sounds very dramatic. The article reports that half a million comments have been submitted to the proposal; I did not count, but you can try here. The NYT also reports that the majority of the comments are in favor of the proposal; again, feel free to count yourself!
The proposal's authors are correct in stating that investors want to know this information. On the SEC website, I searched for 14a-8 shareholder proposals that related to political activities and came up with many requests from companies to exclude proposals relating to political contributions and lobbying activities. In March alone, the SEC responded to requests for no-action letters relating to excluding political contribution proposals from Target; CVS Caremark (no letter given); Western Union (no letter given); Bank of America (no letter given); JP Morgan (included voluntarily); Goldman Sachs (no letter given); Bristol-Myers; Exxon-Mobil (proposal withdrawn); and CBS Corp. (shareholder ineligible). According to this post on the HLS Forum on Corporate Governance and Financial Regulation, this Spring has seen a "renewed blitz of resolutions on corporate campaign finance, particularly indirect lobbying activities, following the record spending in the 2012 election cycle."
But, as the NYT not-so-subtly-hints, a lot of groups, perhaps groups that receive the monies, vehemently oppose the bill, including Americans for Prosperity, the U.S. Chamber of Commerce, the American Gaming ASsociation, the National Retail Federation, and the National Mining Association. The arguments against, though, just aren't that compelling. As you might imagine, saying "our shareholders don't need to know this" or "we don't want our shareholders to know this because then they might sell" doesn't sound very good.
One argument is that the amount of money involved is "immaterial to the company's bottom line." I have two responses. First, executive compensation may be immaterial to the company's bottom line, at least the top 5 compensated that are disclosed under Item 402. Second, in reading the requests for no-action letters from companies that want to exclude shareholder proposals for political activity disclosure, no company cited 14a-8(i)(5), which allows proposals to be excluded if amounts "account for less than 5 percent of the company's total assets" or "net earnings and gross sales" and "is ot otherwise significantly related to the company's business." Companies moved to exclude proposals because they were vague or misleanding (i)(3) or duplicative of past, failed resolutions (i)(11). So, I'm not convinced either that the amounts are immaterial or whether quantitative materiality is necessary.
The other argument is, of course, free speech. I love free speech, but that argument doesn't ring true to me. The SEC wouldn't be limiting or prohibiting political speech, just mandating that corporations tell their owners about it. Their owners. Now, when publicly-held corporations communicate with their owners, that information becomes public, so the mechanism is not perfect. Not only will current and prospective owners know about political activity, but so will consumers and the public at large. But arguing against this potential rule seems to fall under the "protests too much" category.
Finally, last Thursday, the House of Representatives passed the "Focusing the SEC on its Mission Act," to prohibit the SEC from requiring corporations to disclose information regarding political activities. Apparently, that is the SEC's mission -- to not require corporations to disclose information regarding political activities.
I vividly remember learning about 10b5-1 plans while in practice: they struck me then as an elegant and sensible way to insulate yourself from insider trading liability. Even when I don't cover insider trading in Business Associations, I always make sure to mention them. For those unfamiliar, 10b5-1 plans take the trading discretion away from corporate insiders, either by setting some type of formula or prearranged schedule for when to buy or sell company shares, or by vesting the power of decision with a third party that lacks inside knowledge. When done correctly, this "set it and forget it" style investing works great. "I don't know why everyone doesn't set up these plans," I tell my students every year.
Well, apparently many insiders agree--and are doing them the wrong way. The WSJ had an article last November detailing executives setting up plans and then trading almost immediately--when they likely had material nonpublic information. Or, rather than "setting and forgetting," modifying the plan repeatedly.
Today's WSJ has another front page article on 10b5-1 plans, this one focusing on outside directors . The article implies that nonexecutive directors using these plans is in itself questionable, which seems wrong to me: what's good for the goose is good for the gander, and outside directors should be able to protect their personal trading as well as insiders. But the chief problematic examples the article cites involve directors who represent hedge funds, with the hedge fund using the trading plan and trading soon after adopting or modifying it. Take this one:
Double-Take Software... adopted a "cautious stance" about its future financial results on Oct. 27, 2009, according to securities analysts' reports at the time.
Shortly before that, the company briefed board members on its business outlook, said a person familiar with the matter. Among those briefed, the person added, was Ashoke Goswami, a general partner of ABS Capital Partners, a Baltimore-based firm that invests in small, growing companies.
On Nov. 11, 2009, ABS amended a trading plan for Double-Take shares, a change Mr. Goswami disclosed in a regulatory filing. The director then reported the sale by ABS of $3.8 million in Double-Take stock, most of it under the revised plan, in trading from mid-December through Feb. 2, 2010.
On Feb. 3, Double-Take released earnings guidance below analysts' estimates. The stock plunged 21% in a day.
Last week Brian Breheny of Skadden posted some thoughts on these plans over at the Harvard Law School Forum on Corporate Governance and Financial Regulation. He reports that the Council of Institutional Investors recommends that the SEC
- limit the time period for adoption of Rule 10b5-1 trading plans to the issuer’s open trading window;
- prohibit the adoption of multiple, overlapping trading plans;
- require a mandatory three-month or longer delay between plan adoption and the execution of the first trade pursuant to the plan; and
- limit the frequency of modifications and cancellations of trading plans.
Skadden takes issue with some of these recommendations, but the last two make good sense to me. 3 months might be overkill, but requring a delay between adoption and first trade would prevent a lot of of gaming, as would limiting modifications.
I'm not sure where I fall on making the terms of the plans themselves public--I can see that knowing when the CEO has to sell or buy shares would be valuable information, and there might well be good reasons to keep that from the market. In any event, I expect we'll see more and more about these plans in the future.
The SEC just announced that it would split the post of enforcement chief between two lawyers, both alumni of the US Attorney's Office at the SDNY. I've never heard of such an arrangement outside of the Roman Empire; why do it?
Conflict of interest. One of the enforcement directors worked closely with Mary Jo White at her New York firm; the other one can handle Debevoise cases until they age out of the problem. Which means that this does not need to be a permanent arrangment, and perhaps fittingly, the conflict enforcement chief plans on leaving reasonably soon.
But it is also a statement about how such problems come up more the closer you get to the top of an agency. Mary Jo White is hardly the first appointee to bring her favorite person at her law firm along for the ride. But special assistants and assistant deputies are easy to wall off; it used to be that there was only one enforcement director.
Crowdfunding and its implications for the entrepreneurial ecosystem: Setting the research agenda
Leeds School of Business, University of Colorado – Boulder
July 12th & 13th, 2013
Thanks to the generous sponsorship of the Kauffman Foundation, we are pleased to host an intimate academic conference aimed at bringing together experts and scholars from across disciplines such as law, finance, management, marketing and entrepreneurship to discuss current work, and shape the research agenda on crowdfunding. Crowdfunding in all its forms has already become a major force in shaping the options available to individuals looking to fund their ideas, endeavors and businesses. For example, crowdfunding platforms raised about $2.8 billion in 2012, up from $1.5 billion in 2011, according to Forbes estimates. Crowdfunding will likely have a fundamental impact on entrepreneurial finance and the entrepreneurial ecosystem, but exactly how is a matter of much debate. Additionally, developments in this arena promise to provide a useful arena to test theory related to areas such as consumer financial decision-making, information disclosure, opportunity exploitation processes, and stakeholder management.
This conference will provide a forum for discussion of current and emerging work. We invite contributions that represent original, interesting, and ambitious research. To facilitate discussion across and within disciplines, research will be featured in poster and panel sessions to encourage participants to interact one-on-one with each other. The conference will also feature a debate, with experts from academics and practice, including representation of crowdfunding platforms and related service firms.
SUBMISSION GUIDELINES AND REQUIREMENTS: We are seeking two forms of submissions:
- Paper proposals: Please submit an abstract of up to 1000 words on current research on this topic. Papers selected will be presented in poster sessions to encourage one-on-one discussions. Please submit original, unpublished work only.
- Panel proposals: Proposals for panel sessions should include the topic the panel will cover, a list of participants and their contribution to the panel, and a summary of the key objective of the panel. Panel proposals should not exceed 5 pages (single spaced).
Please include a title page with your name, academic affiliation, department affiliation, submission type (paper or panel), and 3-5 keywords. Due date for submissions is Monday, May 6, 2013. Upload submissions here: http://crowdfundconference.org/papers Thanks to the generous contributions of the Kauffman Foundation, on the ground costs (lodging, food, conference registration) for one presenter for each accepted paper and for all panelists for accepted panels will be covered. Accommodations will be at the historic Hotel Boulderado. Please visit our conference website for more details:
You may remember that CEO Reed Hastings ran into trouble last year when he disclosed via his personal Facebook page that Netflix had exceeded 1 billion hours of video watched in a single month. The SEC is letting Mr. Hastings slide on that, but clarified that in the future companies must first identify the social media outlets they will use to disclose company information. This move seems easy and right-- unless the SEC wants to play little Dutch boy. There seems to be no stopping social media.
Next question: how broadly will companies authorize social media disclosure? Dealbook's Michael J. de la Merced observes that "the new move may reduce spontaneity because companies may limit their communications to official corporate accounts and file the information with the agency at the same time." For example, unless Netflix authorized its CEO's personal Facebook page as a communications outlet, Hastings would still be in hot water.
Today's WSJ brings news that private equity giant Carlyle Group is "lowering the velvet rope" : letting some people buy into their funds "with as little as $50,000." While this doesn't exactly open up private equity for your average Joe, it lowers the traditional private equity buy-in bar, which was $5 -20 million at Carlyle, at least. The article characterized Carlyle's move as part of a trend among private equity to broaden their investment offerings. KKR now offers mutual funds investing with a minimum of $2,500 ad Blackstone launched a fund "that for the first time lets affluent individuals invest in hedge funds."
Do you have $50,000 lying around? Think the acquisition market will be heating up and want to catch the next buy-out wave? Not so fast, buddy. To qualify for Carlyle's new fund you also have to be an accredited investor, with $1 million in net worth or $200,000 in income ($300,000 if filing jointly).
I've written recently about the fact that the rich get access to more investing opportunities than everyone else. In Securities Law's Dirty Little Secret I speculate that this differential treatment might be getting harder to maintain. I speculate that investors may not be content for much longer with being shut out of buyout funds and the like. Indeed, I'm working on a short piece now that will argue that JOBS Act Section 201's elimination of the prohibition on general advertising will make the contrast between the investing opportunities available to haves and have-nots all the more stark. It used to be that we couldn't hear advertisements from hedge funds and other private investment opportunities. No more. In the post-JOBS world the airwaves and Internet may tout investment after investment that only the wealthy can actually take advantage of.
Today's WSJ article suggests that there's pressure on the sell side as well as the buy side. It observes that as pension funds-- "the cash cow that for decades has filled [private-equity firms'] coffers" --dry up, buyout shops need new sources of investing dollars. One logical choice is the wealth of accredited individual investors. But the WSJ suggests private equity hunger for still more riches: "Some private-equity executives long to offer their funds to typical workers through 401(k) savings plans, calling access to that pool of money their 'holy grail.'"
Yet more evidence that the old lines between accredited and nonaccredited investors may not hold.
- Here's Bainbridge on the SEC's suit against Illinois: "Why do I call this a stunt? No fine. No relief for the affected bondholders. No benefits for Illinois pensioners, although I grant that that's largely beyond the SEC's jurisdiction. And no additional changes beyond what Illinois has already done."
- Ben Walsh is right, this dodgy hedge fund manager is "hilariously ostentatious." And no master criminal, either - he got really rich doing things that were really obviously fraudulent. At the very least the SEC can catch those guys.
- The NY soda ban injunction isn't really business law, but it is a good illustration of the arbitrary and capricious standard's downside, which can undo compromised, but potentially promising regulation, which in turn might be a byword for your average SEC rulemaking. As the New York judge observed:
- The simple reading of the Rule leads to ... uneven enforcement even within a particular City block, much less the City as a whole...The loopholes in this Rule effective defeat the stated purpose of the Rule. It is arbitrary and capricious because it applies to some but not all food establishments in the city, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on refills, defeat and/or serve to gut the purpose of the Rule.
In light of the controversies surrounding two recent nominees to the SEC's paths in and out of government, I've got a piece in the NY Times/Dealbook making the case for the revolving door. Here's a taste:
the revolving door has some advantages. It may improve the caliber of applicants for government jobs, for example. It probably incentivizes them to perform well in those jobs to show off to future employers. It means that law enforcement officials have some first-hand knowledge of how the industry they regulate works. And it can salt the private sector with government alumni who have come to expect compliance with government requirements.
Moreover, there are democratic reasons to embrace a regular rotation of citizens through government positions, principles that should be familiar to any politician who has praised a part-time legislature. Banning the revolving door, by the same token, would prevent people from working for whom they choose, which is inconsistent with the strong American commitment to free labor, and may even have constitutional implications.
Love to hear your thoughts, either over here or over there.