Investors use research provided by broker-dealers, also known as sell-side research, to help formulate trading ideas and strategies. Investors normally pay for sell-side research through brokerage commissions. Recent European Union regulations require some institutional investment managers to unbundle, or pay separately for research and trade execution. Unbundling might subject a U.S. broker-dealer to regulation under the Investment Advisers Act of 1940, significantly affecting the broker’s business practices. The Securities and Exchange Commission provided temporary no-action relief to avoid potential conflicts between U.S. and EU law while it considers whether to engage in rulemaking on the issue. The outcome could have a substantial effect on the quality of the securities markets. This article argues that investors should have the option to bundle or unbundle payment for sell-side research without affecting the broker’s regulatory status and suggests ways to achieve that outcome.
This article dissects both the origins and resulting harms of what the author terms the “hedge fund conundrum,” in which institutional investors, such as pension plans and endowments, have consistently increased hedge fund allocations over the past decade despite pervasive evidence of excessive fees and subpar returns. It then utilizes an historical institutionalist lens to examine how lawmakers may have enabled a conundrum of this magnitude. By and large, this phenomenon is a symptom of regulatory loopholes that have permitted the private hedge fund market to increase in “publicness” through its expanding access and subsequent harm to retail investors. Such investors are now indirectly exposed to hedge funds through pension plans and endowments, without receiving the investor protection guarantees under the federal securities laws. Subsets of historical institutionalism, such as “conversion” and “drift,” provide useful rubrics in analyzing how the law has evolved in this regard. In terms of conversion, lawmakers initially converted concepts of publicness through administrative regulations and court rulings that expanded indirect retail investor access to private investments. With respect to drift, lawmakers then failed to update these amended definitions to accommodate evolving notions of publicness brought about by financial innovation and changing market conditions. An examination of this nature is novel in this area of the law and it provides a useful guidepost for exploring well-tailored solutions that concede the unlikelihood of subjecting hedge funds to direct regulation. Such a solution would therefore rely on conversion to effectively create a regulated market for “hedge-fund-like” strategies. This would entail loosening (but not eliminating) the section 18 capital restrictions that currently apply to mutual funds. Loosening these restrictions would allow pension plans and other institutional investors to access essential opportunities for wealth maximization, particularly during declining markets, in a transparent market that is subject to extensive regulation. If, however, pension plans and other institutional investors continue to allocate to hedge funds in an inefficient manner, Congress should then consider more drastic measures, such as completely excluding such investors from accessing private investment funds by amending elite investor definitions provided under federal securities laws.
This report and the model contract clauses that it contains are an effort to help companies provide legally effective and operationally likely human rights protections for workers in international supply chains. The report is the product of the Working Group to Draft Human Rights Protections in International Supply Contracts, which is a unit of the American Bar Association Business Law Section. After identifying the problems, such as human trafficking and factory collapses as well as developing compliance obligations under federal, state, and foreign law, the report explains the difficulty of drafting legally effective clauses. Most of the issues result from the focus of established sales law on the conformity of the goods themselves rather than on the conditions under which the goods are made. Other issues stem from the tension between default remedies under sales law and the remedies that buyers and non-parties would prefer in the context of forced labor or other human rights violations. Accordingly, many clauses focus on warranty and remedies issues. In addition, disclaimers attempt to manage company risk by addressing theories of liability advanced in litigation (e.g., undertaking liability, peculiar risk doctrine, and third party beneficiaries). The contract clauses are drafted in the alternative so that they should work under the Uniform Commercial Code (UCC), as it is in effect in most of the US, and under the UN Convention on Contracts for the International Sale of Goods (CISG), which applies to many international sales of goods. Extensive annotations based on legal research explain the drafting choices made.
The Securities and Exchange Commission (“SEC”) has often adopted regulations that effectively exclude specified conduct from the scope of particular provisions of the securities laws or that describe conduct that is deemed not to violate the law. Some rules exclude conduct from the scope of the prohibition on deception imposed by SEC Rule 10b-5. This article examines the nature of and rationales for the provisions that have narrowed the reach of Rule 10b-5, and proposes that this approach be applied more broadly, further reducing the exposure of the issuers of securities and other persons to claims under Rule 10b-5 without impairing the SEC’s enforcement of the securities laws. This will also reduce uncertainty regarding the scope of Rule 10b-5, especially in the arena of private damage claims. Several specific proposals are made here. The intention is to focus attention on the utility of the safe harbor approach in today’s litigation landscape and generate discussion that might lead to broader application of this concept.
In October 2011, the SEC issued new guidelines for disclosure of cybersecurity risks. Some firms responded to these guidelines by issuing new risk factor disclosures. This paper examines the guidelines and cybersecurity disclosures in the context of existing laws governing securities regulation. It then examines empirical results from firm disclosures following the new guidelines. Evidence shows a relatively small proportion of firms chose to modify their risk factor disclosures, with most firms choosing not to disclose any specific cybersecurity risk. Moreover, disclosing firms generally experienced significant negative stock market price effects on account of new disclosures. Rather than viewing disclosure a positive signal of management attentiveness, investors apparently viewed it as a cautionary sign.
The standard story is that the financial crisis resulted in the loss of credit availability. Although the relationship between credit availability and financial decline leading to the crisis was somewhat interactive, I argue that a loss of credit availability appears to have caused the financial crisis more than the reverse. That can teach us at least three lessons. First, because credit availability is now dependent on financial markets as well as banks, financial regulation should be designed to protect the viability of markets as well as banks. Second, diversifying credit sources might increase financial stability. Third, we should try to identify and correct system-wide flaws that can undermine credit availability. One of the most intractable of these flaws is our own inherent human limitations, which we can do little to correct. That suggests an ongoing risk for credit availability, and thus an ongoing potential for new financial crises to arise.
Commentators have discovered that executives who engage in securities transactions purportedly under the shield of a Rule 10b5-1 Plan, so that their trades do not constitute unlawful insider trading, achieve abnormal returns. There is speculation that these returns may be achieved by influencing the timing of corporate disclosures, so that, for example, bad news is withheld at the corporate level until after a Plan sale occurs. This Article concludes that so long as this delay in disclosure does not violate an SEC mandated disclosure requirement, Rule 10b-5 is not violated, nor could the SEC expand Rule 10b-5 to reach disclosure timing of this type. The Article also addresses the application of the common law to disclosure timing. The use of corporate information to time corporate disclosure for a personal benefit, to achieve a more favorable outcome in personal securities trading pursuant to a Plan, may be a breach of duty under the corporate common law of some states, including Delaware, applying established principles of the common law of insider trading. It is unlikely, if not impossible, however, that state regulatory authorities could or would pursue such conduct.If remedial action is needed to discourage, and effectively preclude, disclosure timing, it should be in the nature of SEC mandated disclosures of information regarding Rule 10b5-1 Plans, something the SEC proposed more than ten years ago and then abandoned without explanation, and the exclusion of those who engage in disclosure timing from the benefits of Rule 10b5-1 by amending that rule itself.
