Tag: SEC

Joe Selvaggi talks with Dr. Brian Albrecht, an economists with the International Center for Law and Economics. They separate fact from fiction when it comes to the public’s and politicians’ concerns over allegedly anti-consumer practices of big business and discuss when antitrust action by the federal government is justified.

Guest:

SEC’s Pointless Climate Disclosures

 

Last year, the SEC released very ambitious proposals for disclosures on climate-related issues with these soothing words: “Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.” In the abstract, this message contains a good deal of sense. But in the concrete, the proposition contains some major ambiguities that need resolution to make good on this promise, especially in climate-related cases.

The first question: why would the government need to mandate disclosures of information when private parties, including sophisticated investors, can undertake their own investigations? The advantage of that voluntary system is that it does not require a public official to define exactly what must be done to secure “full and fair disclosure.” Parties who pose hard questions to issuers without getting satisfactory answers are free to go elsewhere. So the correct background assumption is that at best, the securities law should serve as a backup device to private inquiries, not as a first line of defense.

But it would be a mistake to assume that this backup never comes into play. Long before the passage of the Securities and Exchange Acts of 1933 and 1934, the common law had developed rules to deal with fraud, which necessarily had to address both concealment and nondisclosure. The danger of fraud is that it misstates the relative value of key items, especially when the seller makes it appear that his shares have extra value when they don’t. Two bad consequences follow. First, he swindles a buyer who pays $100 for an item worth only $75, and thus bilks his target of $25. Second, that individual imbalance also generates social costs by moving resources from higher- to lower-value uses. Yet the prohibition against fraud can easily be circumvented by stating some facts while omitting others. Whenever there is asymmetric access to information, the ability to conceal, or fail to disclose known facts, can have those same deleterious effects, which is why the SEC mantra of “full and fair disclosure” resonated long before the modern laws were passed.

A Welcome Rebuke to the Administrative State

 

A unanimous Supreme Court has continued its assault on the modern administrative state in its landmark decision in Axon Enterprise, Inc. v. Federal Trade Commission, which also decided Securities and Exchange Commission v. Cochran. The cases arose out of enforcement actions the FTC and SEC, respectively, brought against two private parties. In Axon, the FTC not only blocked a proposed acquisition but also insisted that Axon supply its target with intellectual property for free. In Cochran, the SEC sought to punish Michelle Cochran, a certified public accountant, for minuscule technical violations of the securities law, but only after she quit her accounting job to protest her boss’s shady business practices.

Federal law lets both federal disputes be decided in federal district court. Nonetheless,  both FTC and SEC law allows them to be tried before administrative law judges (ALJs) appointed by the agencies’ respective commissions to resolve the matters. Once an initial hearing is concluded with an ALJ, the individual party can appeal the charging decision to the same commission that brought the original charges. Only after the entire agency proceeding is over may the defendant, now burdened with years of expensive litigation, seek relief from a federal district court on the ground that the agency had no jurisdiction to hear the matter that had just been heard. To avoid that grim fate, both defendants went straight to district court, only to be told that the statutes’ provision of “administrative review followed by judicial review in a federal court of appeals” “implicitly divested” the federal courts’ jurisdiction to intervene at the beginning of the process.

A moment’s reflection should indicate that both the FTC and SEC schemes are seriously misguided. It is no state secret that both agencies have a long track record of turning screws on ordinary individuals through partisan ALJs long before they have a chance to appear before an independent forum. One of the most notorious illustrations of this is Lucia v. SEC, which held that the SEC could pick its own favorite judge before any appeal could be brought in federal court. Hence the immediate march into federal court by Axon and Ms. Cochran.

Another Virtue Signal Goes Broke

 

Samuel Bankman-Fried with US Rep. Maxine Waters, D-CA, outgoing chair of the House Financial Services Committee.

Before November 8, I’d never heard of Samuel Bankman-Fried (SBF). I’d never heard of FTX. I didn’t know that SBF and FTX bought naming rights for the arena where the NBA’s Miami Heat play, nor the University of California at Berkeley’s football stadium.

While I’ve heard of Bitcoin, Ethereum, DogeCoin, and maybe one or two other cryptocurrencies, I’d never heard of FTT, SBF’s creation. I never knew about all the love SBF bought from cultural icons like Larry David or football legend Tom Brady, who did commercials for FTX I never saw.

Stopping the Runaway SEC

 

This past week, the Fifth Circuit Court of Appeals issued a long-overdue blockbuster opinion in Jarkesy v. SEC (2022), which attacks the very foundations of the modern administrative state of which I have long been critical. At issue in that case was a challenge to what is now standard procedure under the 2010 Dodd-Frank Act which allows, as Mario Loyola noted, the United States Securities and Exchange Commission (SEC) to act as “prosecutor, judge, and jury” in major cases that come before it. Why? Because the SEC commissioners: (1) formulate the charges; (2) then appoint an administrative judge on an ad hoc basis to hear the charges, inside the SEC and under SEC procedures; and (3) finally, execute and enforce any punishment. The SEC does this all without any judicial oversight until the appeal stage. This process is designed to exhaust defendants faced with heavy charges, which happened as recently as 2018 in Lucia v. SEC. There, the accused won the right to a new trial before another stacked panel inside the SEC after years of litigation, which, exhausted from the ordeal, he settled on unfavorable terms two years later.

George Jarkesy also faces serious charges and onerous sanctions. The SEC alleged that Jarkesy misrepresented who served as prime broker and auditor, misstated two hedge funds’ “investment parameters and safeguards,” and overvalued firm assets in order to inflate his own fees. The serious sanctions included a civil penalty of $300,000, disgorgement of $685,000 in ill-gotten gains, and a set of prohibitions against engaging in certain industry activities, including associating with brokers, dealers, and advisers, offering penny stocks, and serving as a director or investment adviser to any securities-related firms.

To my mind, the correct response is to hold that the use of these SEC procedures was a flagrant violation of the Due Process Clause of the Fifth Amendment, which reads: “No person shall . . . be deprived of life, liberty, or property, without due process of law.” That clause guards against all abuses by the United States, including all legislative, executive, judicial, and administrative procedures by or in the SEC. The level of protection “due” in litigated cases must ensure that the tribunal be free not only of bias but also of the appearance of bias. Those minimal conditions cannot be satisfied when the SEC flouts the principle of the separation of powers by giving the agency full run of the show.

SEC’s Climate Disclosure Scheme Is a Mess

 

The Securities and Exchange Commission (SEC), which recently flexed its muscles to expand regulations over private equity firms, is at it again. Only this time, the stakes are far higher: its tedious 506-page proposal for mandated disclosures relating to climate change will expose every major corporation in the United States to unending administrative meddling.

As with the private equity proposal, the new SEC initiative provoked a detailed and powerful response from SEC Commissioner Hester Peirce, who disputed virtually every assertion made by the three-member Democratic majority, headed by SEC Chairman Gary Gensler. Gensler claims that the new rules will allow for greater consistency and comparability of the anti-global-warming efforts of different companies. Peirce responds instead that the SEC diktat will force each company to make so many ad hoc factual assumptions that the new findings will be indigestible by the very investors whom it is said to inform and protect. The Democratic majority claims that expanded climate disclosures are always material to prudent investors, citing in support of its position the general remarks of BlackRock CEO Larry Fink, who insists that the threat of global warming requires a “Fundamental Reshaping of Finance.” Peirce responds that the definition of materiality extends only to cover information that private parties use to make investment decisions, but does not cover matters of general public affairs as defined by the ESG—environmental, social, and governance—movement, which often subordinates firm welfare to advance highly intertwined matters of environmental protection and social responsibility. She further insists that these marginal explorations fall outside the statutory authority of the SEC, which contrasts with the Democratic majority’s view that this vast initiative lies at the core of the SEC’s statutory mission.

On balance, Commissioner Peirce has the best of these arguments. But, at this time, I shall go off into a different direction to see whether, wholly apart from these technical legal issues, the entire exercise is worth the candle. On this score, what is so disconcerting about the SEC’s new initiative is how little attention it pays to the central questions that should be preconditions for adopting the novel program in the first place. Here, I can deal with only three of these issues. The first is whether the SEC has demonstrated that global warming is such an existential threat that this bold initiative is warranted. The second is whether the proposed initiative can curb the supposed adverse effects of global warming. And the third is, assuming that the initiative could in the abstract curb such purported effects, whether the proposed institutional design achieves that outcome.

James R. Copland joins Rafael Mangual to discuss how activist investors are turning corporate America’s annual shareholder-meeting process into a political circus.

Most of corporate America is wrapping up the 2019 “proxy season” this month—the period when most publicly traded companies hold their annual meetings. It’s at these gatherings that shareholders can (either directly or by proxy) propose and vote on changes to the company. Since 2011, the Manhattan Institute has tracked these proposals on its Proxy Monitor website. This year’s proxy season has followed a long-term trend: a small group of investors dominates the proceedings, introducing dozens of progressive-inspired proposals on issues ranging from climate change to diversity.

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This week’s college football post comes a day early as there are thrilling matchups to be seen on Friday and Saturday. In the ACC we have No. 11 Florida Gators at the Florida State Seminoles, the N.C. State Wolfpack at the North Carolina Tarheels, and the South Carolina Gamecocks at the No. 2 Clemson Tigers. […]

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With Thanksgiving looming, the chill of an early winter has spread across the land. But the college gridiron remains red-hot. The ACC gives us a potentially thrilling matchup between the No. 3 Notre Dame Fighting Irish and the No. 12 Syracuse Orange. In addition, the N.C. State Wolfpack will try to pick up their seventh […]

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Election Day has come and gone, but college football rolls on! Out east in the ACC, the No. 2 Clemson Tigers are headed for a Beantown showdown with the No. 17 Boston College Eagles. Also, the No. 3 Notre Dame Fighting Irish are hosting the Florida State Seminoles. The Big Ten features the No. 18 […]

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November is here with gridiron glory galore. In the ACC, the No. 21 N.C. State Wolfpack will be defending their home field against the visiting Florida State Seminoles. The Big Ten’s premiere game will feature the No. 5 Michigan Wolverines hosting the No. 14 Penn State Nittany Lions. The SEC features a clash of the […]

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With Halloween just days away, this weekend offers a monster mash-up of games for college football fans. In the ACC, the No. 22 N.C. State Wolfpack head deep into the heart of Yankeeland to play the Syracuse Orange while the Florida State Seminoles will hope for an upset against the visiting No. 2 Clemson Tigers. […]

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The hunt for mid-October supremacy is on with many great games to watch this weekend. The best one may be in the ACC, where the No. 16 North Carolina State Wolfpack are on the road for a showdown with the No. 3 Clemson Tigers. Both teams are undefeated heading into the game. The Big Ten […]

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This has been a very eventful week to say the very least, with drama galore. The college football world promises much the same on Saturday with some potentially thrilling matchups, the greatest of which could well be the Red River Shootout in the Big 12 between the No. 19 Texas Longhorns and the No. 7 […]

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On this last weekend of September, a number of interesting games are on tap that will determine how the rest of the season unfolds. In the Atlantic Coast Conference, there will be a clash of the undefeateds as the No. 3 Clemson Tigers host the visiting Syracuse Orange. The Big Ten gives us what could […]

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The autumn equinox is now upon us, but while some parts of the country may be experiencing the chill of an early fall, the action on the college football gridiron is heating up! In the east, the doughty Demon Deacons of Wake Forest will have a homestand against the visiting No. 8 Notre Dame Fighting […]

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At the midpoint of September, with summer fading and fall looming, some intriguing games are on schedule this Saturday. Among them will be a Big 12 vs. Pac-12 matchup as the Texas Longhorns host the No. 22 USC Trojans – a game that could be either a barnburner or a blowout, depending on which version […]

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It’s been a rainy September here in the Texas Hill Country, but this weekend’s college football matchups should bring clear and sunny skies! There is a Big 12 vs. Big Ten game on tap as the Iowa State Cyclones travel to Iowa City to take on the Iowa Hawkeyes. Also, the Big 12 clashes with […]

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