1.1
AD678 – Financial Regulation
AD678 is a comprehensive financial regulation course, focusing on the key federal statutes that regulate securities and participants in the securities markets: the Securities Act of 1933,
the Securities Exchange Act of 1934, Sarbanes-Oxley, the Dodd-Frank Act of 2010, the Foreign
Corrupt Practices Act, and several criminal statutes applicable to securities fraud and related offenses. We will read statutes and case law and use case studies to understand the practical application of the law in real life. Federal law governs the issuance of securities (“going public”), regulates companies whose shares are being traded (known as “issuers”), and makes rules for everyone working in the securities industry, including investment bankers, brokers, dealers, and investment advisors. Issuers and investment firms (and their employees or directors) who violate federal securities laws and regulations face civil litigation from shareholders, enforcement actions by
the Securities and Exchange Commission, and criminal prosecution by the U.S. Department of
Justice. After successfully completing the course requirements, students should be familiar with
the complex system laws, government agencies, self-regulatory organizations (“SROs”) and
courts governing the securities industry to “protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation.” (www.sec.gov/about/whatwedo.shtml) Students should
also have a basic understanding of the separate system of federal laws and regulations governing
the commercial banking and insurance sectors of the U.S. financial services industry.
1.1.
1.2.
Introduction
•
A schedule of reading assignments and assigned problems is given in the course
schedule (see section 4.3). Students are expected to prepare for the lectures as well as
to do reading and research on their own. The objective of the lectures will be to guide
and clarify student learning. Students are expected to read the required chapters and
other assigned readings and come to class prepared to participate in a group learning
experience. Class attendance is mandatory, and absences more than two classes may
result in failing grade for the course.
•
There are two exams in this course. The first exam will cover the readings, lectures,
and assigned case studies within the first half of the course. The second exam will
focus on the material from the second half of the course. Reviewing notes of class
room lectures and discussions and reading the key statues regulating the securities
industry, and the case law that interprets these statues will be of paramount importance for preparing for the exams.
•
In class we will discuss cases, identify issues, analyze and discuss questions, using
current events and news stories as well as hypothetical examples to better understand
the application of securities regulations in the real world. Students need to come to
class prepared to ask questions and offer their viewpoints on the assigned readings
and case studies.
Prerequisites
a)
Courses:
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PAGE 1
Prereq: No prerequisite courses
b)
Student Competencies:
General understanding of the US Legal System
2.4
Other Information
a)
Getting Started, or What Should I Do First?
The job of a graduate student is to move forward human knowledge.
I know this is intimidating, but my job is to challenge you. I want you to improve—there
wouldn’t be much point in taking this course if you didn’t. Taking this course is not about memorizing a
statute or a case—you could do that by reading on your own. This course is about becoming a critical
thinker, learning to evaluate what you read, investing your brain power to offer novel answers to critical
questions and situations, and evaluating consequences of your own conclusions and solutions.
If that sounds ambitious, it is. I am here to help you through that process. This is challenging –
and challenges are prerequisites for progress! Don’t expect to master financial regulation in the first week
or even by the end of the course. There will always be room for growth in this area. However, when you
successfully complete the class, you should expect to have a much better understanding of the securities
industry and how and why it is regulated. I only know of one way to succeed at mastering this study material: be persistent, don’t give up, review the material until you master it, and attempt to explain it to
someone who is new to the field!
b)
General Guidance
There are no dumb questions. I really believe and practice this. If you have a question, ask!
Challenge everything! The internet has made data accessible to everyone, the problem is that you don’t
know where to turn or how to evaluate the information. Where does it come from? Who wrote it and
why? What is their agenda? So keep in mind this warning: “Use the Internet resources carefully!”
I encourage you to challenge everything. Don’t just read the textbook or assigned statues and
cases. Read with a point of view, with questions to challenging what is being explained. However, if you
challenge something, be sure to be able to back up your claim with research and correct references. This
is a financial regulation course, where art and science merge in various aspects, and there are often more
than one right answer to given situations.
3.
Text & Materials
1.
•
•
Required Text, Course material and Case studies:
Palmiter, Alan, Securities Regulation: Examples and Explanations, 7th ed., ISBN-13: 9781454881308, ISBN-10: 1454881305(“Text”)
The SEC website (https://www.sec.gov/about.shtml) is a great repository of helpful resources for
understanding the materials in this course, including links to the full text of the statutes we study.
It is very helpful to peruse the website for more information for all the topics in this class.
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PAGE 2
•
3.2
Much of our course material will be publicly available statutes, regulations, and case law. I will
post all case law on Blackboard and you can find links to the statutes via
https://www.sec.gov/about/laws.shtml
Optional Readings:
Wall Street Journal:
Business Week:
NY Times (Business Section):
Financial Times
The Economist
www.wsj.com
www.businessweek.com
www.nytimes.com
www.ft.com
www.economist.com
4.
Course Overview and Details
4.1
Course Learning Goals and Objectives
•
•
•
•
•
•
•
•
•
4.2
Understand the role of the Securities and Exchange Commission in regulating securities markets and their participants
Understand how federal securities laws and regulations protect investors in the issuance of
securities through disclosures by issuers
Understand the ways in which issuers are regulated by the federal government, including
through anti-fraud provisions, disclosure requirements, corporate governance regulations, and
anti-bribery laws
Understand how securities laws and regulations apply to the accountants, lawyers, and bankers for securities issuers
Learn what constitutes insider trading
Consider the line between what is legal and what is ethical in the financial services industry
Be introduced to the regulations that govern those who work in the financial industry, including brokers, dealers, and investment advisors
Understand how federal law criminalizes bad behavior in the securities industry
Be acquainted with the separate structure of federal laws and regulations governing the commercial banking and insurance sectors
Course Expectations
a) The course will be conducted by a sequence of weekly classroom lectures. A learning partnership and the development of a class community are essential to a meaningful experience in
this course. Students learn from students. As a member of the class learning community,
each student is responsible for contributing to the educational experience of the entire class.
The class participation grade will reflect the quality and quantity of contributions to class discussions and teams as well as other voluntary activities inside and outside the classroom that
enhance the course experience for everyone. The best way to judge your performance in this
area is to ask yourself after every class: “what value did I provide in class today”?
b) Learning in this class requires significant preparation before class, and deep immersion in the
material. Skimming the materials will not suffice. The workload in and out of class will vary
from week to week. Because much of your grade is based on class participation, you must
prepare for class. Although every student is different, you should be spending at least two
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hours to prepare for most of our class sessions. This estimate includes time to read the assigned materials, think, read them again, and take careful notes. You should also be asking
me (or your classmates) questions and doing additional background research if you have
questions or curiosities.
c) Current Event Research Paper:
One of the best things about studying securities regulation is that the topic is in the news
every day. Every day a new company chooses to go public, another executive at a public
company is charged with violating anti-fraud provisions, or another public company is investigated for attempting to bribe foreign government officials. The current event research paper
assignment asks that you choose one current event relevant to any of the topics we will study
this semester, and write a research paper describing what happened, the relevant law, and the
significance of the story for the industry, the company, the law, and/or you.
How to choose your current event:
The current event must have been in the news within the last six months. To find a topic of
interest, start reading the financial and business news now. You might also visit the SEC’s
website for press releases, or some of the many blogs on securities regulation, white-collar
crime, or corruption. You can also follow the SEC on Twitter. Once you find a news story,
you will research it more deeply, including the relevant law. Your story does not have to be a
case that has gone to court already. It can be an investigation, a proposed new rule or regulation, or any other story that implicates the legal issues we discuss in class.
What to include in your paper:
• a detailed description of the current event
• a detailed discussion of the relevant law – explain the law from the very beginning, as if
your reader knows nothing about the topic; this is how you demonstrate your understanding
of the law
• an analysis of the current event – Why is it important to the industry? What companies
will care about this news story? What will its impact be? Who will win? Why? You can
choose to answer any or all of these questions (or any other question). The goal is to demonstrate meaningful application of law to facts, and deep thinking about the issues presented by
the news story
Logistics:
• 10-15 pages, double spaced
• Citation required anytime what you just wrote down did not originate in your own brain.
• The paper should be prepared using the APA writing style and guideline for references
format. You must provide a bibliography, and all direct quotations and data sources must be
properly cited.
• The Department uses the APA style to facilitate reading the paper and understanding references without being as cumbersome as some other citation styles (such as Chicago or
MLA).
• Students can download the student style guide from the American Psychological Association (http://www.apastyle.org/elecref.html) web site or you can purchase the APA style
guide from the book store. There are additional resources available on a variety of websites.
• Papers are to be RESEARCH PAPERS. Remember that work that you use from other authors MUST be referenced. Since it is assumed that you are not an authority on the topic that
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PAGE 4
you are writing, it is expected that this paper is an overview of many different sources of information. Each of these must be attributed to the author using the APA format.
• This is your paper and not the cut and paste of someone else’s work. The internet has led
to a false sense of what research is all about. Those new to research tend to think that it
means spending an afternoon surfing the internet and then an afternoon cutting from material
available.
• Keep in mind that the Internet: (1) is not quality oriented as it has good materials and not
so good materials, and does not know the difference; (2) is NOT a sole source location. In
particular, sources such as Wikipedia are the works of individual submitters which are not
reviewed. Thus while many entries provide excellent information, some are fundamentally
flawed or just plain wrong.
• Keep in mind that the Boston University Library as well as your local, state and the national US Library of Congress have extensive online services. USE THEM.
d) Historic Financial Scams
Much of the law regulating the financial industry is reactive: Congress passes laws after
things go badly. Thus, to truly understand securities regulation and white-collar criminal
laws, one must know the historical context in which the laws were passed. For better or
worse, financial scams usually involve larger than life characters and creative schemes. So I
hope you have fun learning about the “bad guys” of the finance world.
In teams, you will be asked to research one of the historic financial scams that connect to our
laws today. You will present your learning to the class. Each presentation should explain:
• Who are the key players?
• What was the financial scam or scheme?
• What laws were violated? Or, if you were assigned a really old scam, what current laws
would have been violated if it had been carried out today?
• What was the popular or political response to the scam?
• What was the regulatory response to the scam? Did it lead to any changes in the law –
either immediately or in the longer run?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
The Scams (by Team #)
Charles Ponzi – The Original “Ponzi” Scheme
Ivar Kreuger – Match King Hoax
Eddie Antar – Crazy Eddie
Barry Minkow – ZZZZ Best Cleaners (1986)
Bernie Madoff – The Biggest to Date
Michael Milken – The Junk Bond King
Bernie Ebbers – WorldCom
Ivan Boesky – Insider Trading
Samuel Israel III – Hedge Fund scandal
Whitaker Wright – Fruad
Hank Greenberg – AIG
Charles Keating – Savings & Loan
Jeff Skilling & Kenneth Lay – Enron
Dennis Kozlowski – Tyco
Lehman Brothers
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e) Exams
You will have two exams in this course. The course material is dense, so we will divide it in
half with each half being tested on separate exams. The exams are NOT cumulative. In most
cases, the exams will ask students to answer a series of questions by applying the law they
have learned to a hypothetical fact scenario.
4.3
Schedule
a) Class Schedule
Class Date
Readings/Cases/Material
1
Text:
• Chapter 1 Introduction to Securities
Markets and Regulation, §§1.1.1 1.3.5, 1.5
• Chapter 12 Public Enforcement,
§§12.1-12.4
9/7
Learning Goals/Class Questions
Read:
• https://www.sec.gov/about/what-we-do
2
9/14
Text:
• Chapter 2 Definition of Security
• Chapter 3 Materiality
Read:
• SEC Staff Accounting Bulletin #99;
Materiality – https://www.sec.gov/interps/account/sab99.htm
Cases:
1) SEC v. Howey (U.S. 1946)
2) TSC Industries Inc. v. Northway, Inc.
(U.S. 1976)
3) Basic v. Levinson (U.S. 1988)
Write up 1 of the 3 above cases
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Introduction to Securities Markets & Regulations
What is the “Efficient Market Hypothesis”
Overview: The History and Purpose of Securities Regulation in the U.S.
Meet the SEC: what does the SEC do? How
does it impact the finance industry?
Understanding who can bring lawsuits or
criminal charges for violations of securities
laws
The differences among government enforcement, criminal charges, and shareholder litigation
How did the Supreme Court define an
“investment contract” in Howey?
What kinds of financial arrangements
constitute “securities”?
What are the implications of being a security?
How do the securities laws balance investors’ need for information against issuers’ burden of disclosure?
Why is materiality important?
How did the Supreme Court define “material” in TSC Industries?
What did Basic v. Levinson add to the
definition?
What is the “half-truth rule”?
3
9/21
Text:
• Chapter 4 Registration of Securities Offerings, §§4.1, 4.2
• Chapter 5 Exemptions from Securities
Act Registration
• Chapter 6 Securities Act Liability
Read:
• Inside the Deal that Made Bill Gates
$350,000,000
• JOBS Act of 2012
SEC, Securities Act Rule Regulation
D: Exemption for limited offers and
sales without regard to dollar amount
of offering.
https://www.law.cornell.edu/cfr/text/17/230.506
4
9/28
Text:
• Chapter 8 Securities Exchange Act of
1934, Introduction and §§8.1 – 8.2.3
Bring in a copy of a prospectus or an S-1
registration statement, and a proxy statement for a new issuer of your choice
Presentation: Team 1
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PAGE 7
What is the subject matter and structure
of the Securities Act of 1933?
How are securities sold to the public?
What is the role of underwriters?
What are the anti-fraud provisions governing the issuance of securities?
Who can be held liable for fraud in the issuance of securities?
What is “joint and several” liability as
compared with “proportional” liability”?
What are rights of contribution and indemnification?
What is the “due diligence” defense?
How is a prospectus helpful in a securities fraud defense?
What is “Gun-Jumping”? — a “red herring”?
What securities are exempt from the Securities Act? Why?
What transactions are exempt from the
Securities Act? Why?
What is the goal of the JOBS Act?
How do exemptions help small(er) businesses raise capital efficiently?
What limitations/requirements apply to
the exemption for small offerings?
What is a “private placement”?
What limitations/requirements apply to
private placements?
What is the subject matter and structure
of the Securities Exchange Act of 1934?
How does the Exchange Act regulate issuers?
What are the disclosure requirements of
the Exchange Act? (How) do they differ
from Securities Act requirements?
What information is typically included in
a securities registration statement?
— in a prospectus? — in a periodic report? How do they differ?
What is an S-3 filer?
5
10/5
Text:
• Chapter 11 §§11.2 Broker-Dealer Regulation
Read:
• https://www.sec.gov/news/studies/2011/913studyfinal.pdf
Presentation: Team 2
Presentation: Team 3
How are broker dealers regulated?
What is a self-regulatory regulation?
How does the SEC enforce governance of
broker-dealers?
What are the duties of broker-dealers? Of
register representatives?
Regulation of the Securities Industry: Underwriters, Brokers, Dealers, Investment Advisors, and others
Understanding the roles of FINRA and the
SEC in regulating the conduct of Broker/Dealers
How does the Exchange Act regulate securities market participants other than issuers?
Reminder NO CLASS NEXT WEEK
6
10/19 Text:
• Chapter 11 §§11.3 Investment Adviser
Regulation and §§11.4 Mutual Fund
Regulation
Read:
• https://www.sec.gov/news/studies/2011/913studyfinal.pdf
Presentation: Team 4
EXAM PREP REVIEW
7
10/26
EXAM 1
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PAGE 8
How are investment companies regulated?
How is the regulation of investment companies different from other securities market
participants?
How are investment advisers regulated?
How are investment advisers different from
broker-dealers?
What are the reasons credit rating agencies
are regulated?
Mutual funds and the Investment Company
Act of 1940: What is a registered investment company? How does it differ from a
“hedge fund” or “private equity fund”?
Understanding how the Investment Advisers
Act of 1940 regulates the conduct of Investment Advisor
8
11/2
Text:
• Chapter 8, §§8.3 – 8.33 Regulation of
Public Companies
• Chapter 8, §§8.4 – 8.4.4 Proxy Regulation (A Summary)
• Chapter 8, §§8.5 – 8.5.4 Regulation of
Tender Offers (A Summary)
• Chapter 1, §§1.4 -1.4.2 Beyond Disclosure: Federal Incursions into Corporate Governance
• Chapter 8, §§8.3.4 – 8.3.5 Oversight of
Corporate Misconduct
Presentation: Team 5
Presentation: Team 6
9
11/9
Text:
• Chapter 9 Rule 10b-5
Cases:
1) Kardon v. National Gypsum Co. (E.D.
Pa. 1946)
2) Blue Chip Stamps v. Manor Drug
Stores (U.S. 1975)
3) Matrixx Initiatives, Inc. v. Siracusano
(U.S. 2011)
4) In re HP Secs. Litig. (N.D. Cal. 2013)
5) Central Bank of Denver v. First Interstate Bank of Denver (U.S. 1994)
6) Dura Pharmaceuticals v. Broudo (U.S.
2005)
7) Erica P. John Fund Inc. v. Halliburton
Co. (U.S. 2011) Fed.R.Civ.P., Rule 23
Presentation: Team 7
Presentation: Team 8
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Public company registration and reporting requirements
Registration requirements, holders of record,
exchange listing
Reporting — What forms must an issuer use
to comply with the reporting requirements of
the Exchange Act?
What information must be included in SEC
form filings?
How does an issuer determine what information to include in a required securities filing/disclosure document?
Proxy Disclosure
The Williams Act — 5% Stock Acquisitions
and Tender Offers
Sarbanes Oxley and Dodd-Frank: Substantive
regulation of issuers — use of disclosure and
listing requirements to affect corporate governance structures and ethics codes
Understanding the ways in which SOX regulates issuers
Understanding ways in which Dodd-Frank
regulates issuers
Rule 10b-5 — Origins and Overview
Origins
Private cause of action, standing?
Scienter and materiality
Reliance, loss causation and secondary liability
What is the “Fraud on the Market” Theory?
What are the requirements for certification of
a securities class action?
SEC Enforcement
Write up 1 of the above 7 cases
10
11/16 Text:
• Chapter 10 Insider Trading
Cases:
1) Chiarella v. U.S. (1980)
2) U.S. v. O’Hagan (only through p. 666
of opinion)
3) Dirks v. SEC
4) United States v. Martoma (2d Cir.
2017)(dissent only)
Presentation: Team 9
Presentation: Team 10
Write up 1 of the above 4 cases
11
11/23 Read:
•
•
Whistleblower law
18 U.S.C. §1514A (SARBOX)
15 U.S.C. § 78u-6 (Dodd-Frank Act)
Cases:
1) Berman v. [email protected] LLC
https://www.sec.gov/about/offices/owb/owb-resources.shtml
2) Digital Realty Trust, Inc. v. Somers:
https://www.supremecourt.gov/opinions/17pdf/16-1276_b0nd.pdf
Presentation: Team 11
Presentation: Team 12
Write up 1 of the above 2 cases
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Insider Trading
What is insider trading? When is it illegal?
What are the penalties for illegal insider trading? How is the law enforced?
How was insider trading defined in Chiarella?
How did O’Hagan expand government regulation of insider trading?
When is a “tippee” guilty of illegal insider
trading?
When is a “tipper” guilty of illegal insider
trading?
Corporate obligation to prevent illegal insider
trading
Compare: Exchange Act Section 16(b) — Insider stock ownership reporting and shortswing profits liability.
Whistleblower protections under the securities laws
What is a “whistleblower” and why does it
need protection?
Understanding the different definitions and
remedies for retaliation under SOX and the
Dodd-Frank Act
Does internal whistleblowing qualify for antiretaliation protection?
The Dodd-Frank Act’s Bounty Program
12
11/30
Read:
DOJ-SEC Guide to the FCPA
https://www.sec.gov/spotlight/foreigncorrupt-practices-act.shtml
Recordkeeping and internal controls provisions of the FCPA:
https://www.sec.gov/spotlight/fcpa/fcparecordkeeping.pdf
FINCEN, Bank Secrecy Act,
https://www.fincen.gov/resources/statutes-regulations/guidance/sharing-suspicious-activity-reports-securities-broker
Office of Foreign Assets Control, Sanctions Regulations
U.S. Department of the Treasury, Bank
Secrecy Act Regulations, 31 CFR
1010.320
FinCen, Guidance on Preparing a Complete and Sufficient Suspicious Activity
Report Narrative (Nov. 2003)
Federal Deposit Insurance Act, Sections
3(q) and -(u), 8(b), -(e), -(g), and -(i)12
U.S.C. §§ 1813(q), -(u), 1818(b), -(e), -(g)
and -(i)
Bank Holding Company Act, 12 U.S.C.
§§1843(c)(8), 1851
Presentation: Team 13
Presentation: Team 14
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PAGE 11
Foreign Corrupt Practices Act:
§13: Applicability of FCPA to public companies with domestic-only activities
Should the U.S. be regulating conduct outside of its borders?
What is something of value?
What level of intent is required to violate
FCPA?
Foreign Corrupt Practices Act: Realities of
Enforcement
FINCEN and the Bank Secrecy Act
“Suspicious Activity Reports” and their handling
OFAC and Foreign Sanctions Regulations
Federal Banking Laws governing securities
activities of commercial banks: GlassSteagall Act, Gramm-Leach-Bliley Act,
Bank Holding Company Act and the
Volcker Rule
Bank regulatory agency enforcement powers
“Institution-affiliated parties”
13
12/7
Text:
• Chapter 9 Racketeer Influenced and
Corrupt Organizations Act, §9.5.3
• Chapter 12, Criminal Enforcement,
§§12.5 – 12.5.6
Read:
• 18 U.S.C. Section 1348
• U.S. Sentencing Guidelines §8B2.1
(Effective Compliance & Ethics Program)
• U.S. Attorneys Manual 9-28.000
(Prosecution of Business Organizations)
Cases:
1) U.S. v. Kaiser (2d Cir. 2010)
2) Boyle v. U.S. (U.S. 2009)
3) U.S. v. Milikowsky (2d Cir. 1995)
4) U.S. v. Ebbers (2d Cir. 2006) (just
sentencing portion of opinion)
5) “Yates Memorandum” (U.S. DOJ
9/9/2015)
Presentation: Team 15
Write up 1 of the above 5 cases
Current Event Paper Due
EXAM PREP REVIEW
14
12/14 EXAM 2
A.
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Criminal Liability for Violations of Financial Regulatory Statutes — Criminal Securities Fraud: When does a violation become
criminal?
Understanding the far reach of federal prosecutors — How Federal prosecutors use of
mail and wire fraud, RICO and criminal tax
prosecutions to reach wide range of financial corruption and “white collar” crimes
Can an organized crime law be used against
a legitimate business?
Difference between civil and criminal RICO
What is an “enterprise” for the purposes of
RICO?
What steps can and should a public company take to best protect itself and its directors, officers and employees from criminal
prosecution?
What factors do Federal prosecutors and
judges take into account in sentencing corporations and “white collar criminals” convicted violations of the securities laws or
other criminal offenses?
Should the sentencing judge consider impact
on a defendant’s business in sentencing?
Is it reasonable to consider loss to shareholders in calculating defendant’s sentence?
Purchase answer to see full
attachment
AD678 – Financial Regulation
AD678 is a comprehensive financial regulation course, focusing on the key federal statutes that regulate securities and participants in the securities markets: the Securities Act of 1933,
the Securities Exchange Act of 1934, Sarbanes-Oxley, the Dodd-Frank Act of 2010, the Foreign
Corrupt Practices Act, and several criminal statutes applicable to securities fraud and related offenses. We will read statutes and case law and use case studies to understand the practical application of the law in real life. Federal law governs the issuance of securities (“going public”), regulates companies whose shares are being traded (known as “issuers”), and makes rules for everyone working in the securities industry, including investment bankers, brokers, dealers, and investment advisors. Issuers and investment firms (and their employees or directors) who violate federal securities laws and regulations face civil litigation from shareholders, enforcement actions by
the Securities and Exchange Commission, and criminal prosecution by the U.S. Department of
Justice. After successfully completing the course requirements, students should be familiar with
the complex system laws, government agencies, self-regulatory organizations (“SROs”) and
courts governing the securities industry to “protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation.” (www.sec.gov/about/whatwedo.shtml) Students should
also have a basic understanding of the separate system of federal laws and regulations governing
the commercial banking and insurance sectors of the U.S. financial services industry.
1.1.
1.2.
Introduction
•
A schedule of reading assignments and assigned problems is given in the course
schedule (see section 4.3). Students are expected to prepare for the lectures as well as
to do reading and research on their own. The objective of the lectures will be to guide
and clarify student learning. Students are expected to read the required chapters and
other assigned readings and come to class prepared to participate in a group learning
experience. Class attendance is mandatory, and absences more than two classes may
result in failing grade for the course.
•
There are two exams in this course. The first exam will cover the readings, lectures,
and assigned case studies within the first half of the course. The second exam will
focus on the material from the second half of the course. Reviewing notes of class
room lectures and discussions and reading the key statues regulating the securities
industry, and the case law that interprets these statues will be of paramount importance for preparing for the exams.
•
In class we will discuss cases, identify issues, analyze and discuss questions, using
current events and news stories as well as hypothetical examples to better understand
the application of securities regulations in the real world. Students need to come to
class prepared to ask questions and offer their viewpoints on the assigned readings
and case studies.
Prerequisites
a)
Courses:
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PAGE 1
Prereq: No prerequisite courses
b)
Student Competencies:
General understanding of the US Legal System
2.4
Other Information
a)
Getting Started, or What Should I Do First?
The job of a graduate student is to move forward human knowledge.
I know this is intimidating, but my job is to challenge you. I want you to improve—there
wouldn’t be much point in taking this course if you didn’t. Taking this course is not about memorizing a
statute or a case—you could do that by reading on your own. This course is about becoming a critical
thinker, learning to evaluate what you read, investing your brain power to offer novel answers to critical
questions and situations, and evaluating consequences of your own conclusions and solutions.
If that sounds ambitious, it is. I am here to help you through that process. This is challenging –
and challenges are prerequisites for progress! Don’t expect to master financial regulation in the first week
or even by the end of the course. There will always be room for growth in this area. However, when you
successfully complete the class, you should expect to have a much better understanding of the securities
industry and how and why it is regulated. I only know of one way to succeed at mastering this study material: be persistent, don’t give up, review the material until you master it, and attempt to explain it to
someone who is new to the field!
b)
General Guidance
There are no dumb questions. I really believe and practice this. If you have a question, ask!
Challenge everything! The internet has made data accessible to everyone, the problem is that you don’t
know where to turn or how to evaluate the information. Where does it come from? Who wrote it and
why? What is their agenda? So keep in mind this warning: “Use the Internet resources carefully!”
I encourage you to challenge everything. Don’t just read the textbook or assigned statues and
cases. Read with a point of view, with questions to challenging what is being explained. However, if you
challenge something, be sure to be able to back up your claim with research and correct references. This
is a financial regulation course, where art and science merge in various aspects, and there are often more
than one right answer to given situations.
3.
Text & Materials
1.
•
•
Required Text, Course material and Case studies:
Palmiter, Alan, Securities Regulation: Examples and Explanations, 7th ed., ISBN-13: 9781454881308, ISBN-10: 1454881305(“Text”)
The SEC website (https://www.sec.gov/about.shtml) is a great repository of helpful resources for
understanding the materials in this course, including links to the full text of the statutes we study.
It is very helpful to peruse the website for more information for all the topics in this class.
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PAGE 2
•
3.2
Much of our course material will be publicly available statutes, regulations, and case law. I will
post all case law on Blackboard and you can find links to the statutes via
https://www.sec.gov/about/laws.shtml
Optional Readings:
Wall Street Journal:
Business Week:
NY Times (Business Section):
Financial Times
The Economist
www.wsj.com
www.businessweek.com
www.nytimes.com
www.ft.com
www.economist.com
4.
Course Overview and Details
4.1
Course Learning Goals and Objectives
•
•
•
•
•
•
•
•
•
4.2
Understand the role of the Securities and Exchange Commission in regulating securities markets and their participants
Understand how federal securities laws and regulations protect investors in the issuance of
securities through disclosures by issuers
Understand the ways in which issuers are regulated by the federal government, including
through anti-fraud provisions, disclosure requirements, corporate governance regulations, and
anti-bribery laws
Understand how securities laws and regulations apply to the accountants, lawyers, and bankers for securities issuers
Learn what constitutes insider trading
Consider the line between what is legal and what is ethical in the financial services industry
Be introduced to the regulations that govern those who work in the financial industry, including brokers, dealers, and investment advisors
Understand how federal law criminalizes bad behavior in the securities industry
Be acquainted with the separate structure of federal laws and regulations governing the commercial banking and insurance sectors
Course Expectations
a) The course will be conducted by a sequence of weekly classroom lectures. A learning partnership and the development of a class community are essential to a meaningful experience in
this course. Students learn from students. As a member of the class learning community,
each student is responsible for contributing to the educational experience of the entire class.
The class participation grade will reflect the quality and quantity of contributions to class discussions and teams as well as other voluntary activities inside and outside the classroom that
enhance the course experience for everyone. The best way to judge your performance in this
area is to ask yourself after every class: “what value did I provide in class today”?
b) Learning in this class requires significant preparation before class, and deep immersion in the
material. Skimming the materials will not suffice. The workload in and out of class will vary
from week to week. Because much of your grade is based on class participation, you must
prepare for class. Although every student is different, you should be spending at least two
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PAGE 3
hours to prepare for most of our class sessions. This estimate includes time to read the assigned materials, think, read them again, and take careful notes. You should also be asking
me (or your classmates) questions and doing additional background research if you have
questions or curiosities.
c) Current Event Research Paper:
One of the best things about studying securities regulation is that the topic is in the news
every day. Every day a new company chooses to go public, another executive at a public
company is charged with violating anti-fraud provisions, or another public company is investigated for attempting to bribe foreign government officials. The current event research paper
assignment asks that you choose one current event relevant to any of the topics we will study
this semester, and write a research paper describing what happened, the relevant law, and the
significance of the story for the industry, the company, the law, and/or you.
How to choose your current event:
The current event must have been in the news within the last six months. To find a topic of
interest, start reading the financial and business news now. You might also visit the SEC’s
website for press releases, or some of the many blogs on securities regulation, white-collar
crime, or corruption. You can also follow the SEC on Twitter. Once you find a news story,
you will research it more deeply, including the relevant law. Your story does not have to be a
case that has gone to court already. It can be an investigation, a proposed new rule or regulation, or any other story that implicates the legal issues we discuss in class.
What to include in your paper:
• a detailed description of the current event
• a detailed discussion of the relevant law – explain the law from the very beginning, as if
your reader knows nothing about the topic; this is how you demonstrate your understanding
of the law
• an analysis of the current event – Why is it important to the industry? What companies
will care about this news story? What will its impact be? Who will win? Why? You can
choose to answer any or all of these questions (or any other question). The goal is to demonstrate meaningful application of law to facts, and deep thinking about the issues presented by
the news story
Logistics:
• 10-15 pages, double spaced
• Citation required anytime what you just wrote down did not originate in your own brain.
• The paper should be prepared using the APA writing style and guideline for references
format. You must provide a bibliography, and all direct quotations and data sources must be
properly cited.
• The Department uses the APA style to facilitate reading the paper and understanding references without being as cumbersome as some other citation styles (such as Chicago or
MLA).
• Students can download the student style guide from the American Psychological Association (http://www.apastyle.org/elecref.html) web site or you can purchase the APA style
guide from the book store. There are additional resources available on a variety of websites.
• Papers are to be RESEARCH PAPERS. Remember that work that you use from other authors MUST be referenced. Since it is assumed that you are not an authority on the topic that
[Updated 09.04.2021 FT]
PAGE 4
you are writing, it is expected that this paper is an overview of many different sources of information. Each of these must be attributed to the author using the APA format.
• This is your paper and not the cut and paste of someone else’s work. The internet has led
to a false sense of what research is all about. Those new to research tend to think that it
means spending an afternoon surfing the internet and then an afternoon cutting from material
available.
• Keep in mind that the Internet: (1) is not quality oriented as it has good materials and not
so good materials, and does not know the difference; (2) is NOT a sole source location. In
particular, sources such as Wikipedia are the works of individual submitters which are not
reviewed. Thus while many entries provide excellent information, some are fundamentally
flawed or just plain wrong.
• Keep in mind that the Boston University Library as well as your local, state and the national US Library of Congress have extensive online services. USE THEM.
d) Historic Financial Scams
Much of the law regulating the financial industry is reactive: Congress passes laws after
things go badly. Thus, to truly understand securities regulation and white-collar criminal
laws, one must know the historical context in which the laws were passed. For better or
worse, financial scams usually involve larger than life characters and creative schemes. So I
hope you have fun learning about the “bad guys” of the finance world.
In teams, you will be asked to research one of the historic financial scams that connect to our
laws today. You will present your learning to the class. Each presentation should explain:
• Who are the key players?
• What was the financial scam or scheme?
• What laws were violated? Or, if you were assigned a really old scam, what current laws
would have been violated if it had been carried out today?
• What was the popular or political response to the scam?
• What was the regulatory response to the scam? Did it lead to any changes in the law –
either immediately or in the longer run?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
The Scams (by Team #)
Charles Ponzi – The Original “Ponzi” Scheme
Ivar Kreuger – Match King Hoax
Eddie Antar – Crazy Eddie
Barry Minkow – ZZZZ Best Cleaners (1986)
Bernie Madoff – The Biggest to Date
Michael Milken – The Junk Bond King
Bernie Ebbers – WorldCom
Ivan Boesky – Insider Trading
Samuel Israel III – Hedge Fund scandal
Whitaker Wright – Fruad
Hank Greenberg – AIG
Charles Keating – Savings & Loan
Jeff Skilling & Kenneth Lay – Enron
Dennis Kozlowski – Tyco
Lehman Brothers
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e) Exams
You will have two exams in this course. The course material is dense, so we will divide it in
half with each half being tested on separate exams. The exams are NOT cumulative. In most
cases, the exams will ask students to answer a series of questions by applying the law they
have learned to a hypothetical fact scenario.
4.3
Schedule
a) Class Schedule
Class Date
Readings/Cases/Material
1
Text:
• Chapter 1 Introduction to Securities
Markets and Regulation, §§1.1.1 1.3.5, 1.5
• Chapter 12 Public Enforcement,
§§12.1-12.4
9/7
Learning Goals/Class Questions
Read:
• https://www.sec.gov/about/what-we-do
2
9/14
Text:
• Chapter 2 Definition of Security
• Chapter 3 Materiality
Read:
• SEC Staff Accounting Bulletin #99;
Materiality – https://www.sec.gov/interps/account/sab99.htm
Cases:
1) SEC v. Howey (U.S. 1946)
2) TSC Industries Inc. v. Northway, Inc.
(U.S. 1976)
3) Basic v. Levinson (U.S. 1988)
Write up 1 of the 3 above cases
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PAGE 6
Introduction to Securities Markets & Regulations
What is the “Efficient Market Hypothesis”
Overview: The History and Purpose of Securities Regulation in the U.S.
Meet the SEC: what does the SEC do? How
does it impact the finance industry?
Understanding who can bring lawsuits or
criminal charges for violations of securities
laws
The differences among government enforcement, criminal charges, and shareholder litigation
How did the Supreme Court define an
“investment contract” in Howey?
What kinds of financial arrangements
constitute “securities”?
What are the implications of being a security?
How do the securities laws balance investors’ need for information against issuers’ burden of disclosure?
Why is materiality important?
How did the Supreme Court define “material” in TSC Industries?
What did Basic v. Levinson add to the
definition?
What is the “half-truth rule”?
3
9/21
Text:
• Chapter 4 Registration of Securities Offerings, §§4.1, 4.2
• Chapter 5 Exemptions from Securities
Act Registration
• Chapter 6 Securities Act Liability
Read:
• Inside the Deal that Made Bill Gates
$350,000,000
• JOBS Act of 2012
SEC, Securities Act Rule Regulation
D: Exemption for limited offers and
sales without regard to dollar amount
of offering.
https://www.law.cornell.edu/cfr/text/17/230.506
4
9/28
Text:
• Chapter 8 Securities Exchange Act of
1934, Introduction and §§8.1 – 8.2.3
Bring in a copy of a prospectus or an S-1
registration statement, and a proxy statement for a new issuer of your choice
Presentation: Team 1
[Updated 09.04.2021 FT]
PAGE 7
What is the subject matter and structure
of the Securities Act of 1933?
How are securities sold to the public?
What is the role of underwriters?
What are the anti-fraud provisions governing the issuance of securities?
Who can be held liable for fraud in the issuance of securities?
What is “joint and several” liability as
compared with “proportional” liability”?
What are rights of contribution and indemnification?
What is the “due diligence” defense?
How is a prospectus helpful in a securities fraud defense?
What is “Gun-Jumping”? — a “red herring”?
What securities are exempt from the Securities Act? Why?
What transactions are exempt from the
Securities Act? Why?
What is the goal of the JOBS Act?
How do exemptions help small(er) businesses raise capital efficiently?
What limitations/requirements apply to
the exemption for small offerings?
What is a “private placement”?
What limitations/requirements apply to
private placements?
What is the subject matter and structure
of the Securities Exchange Act of 1934?
How does the Exchange Act regulate issuers?
What are the disclosure requirements of
the Exchange Act? (How) do they differ
from Securities Act requirements?
What information is typically included in
a securities registration statement?
— in a prospectus? — in a periodic report? How do they differ?
What is an S-3 filer?
5
10/5
Text:
• Chapter 11 §§11.2 Broker-Dealer Regulation
Read:
• https://www.sec.gov/news/studies/2011/913studyfinal.pdf
Presentation: Team 2
Presentation: Team 3
How are broker dealers regulated?
What is a self-regulatory regulation?
How does the SEC enforce governance of
broker-dealers?
What are the duties of broker-dealers? Of
register representatives?
Regulation of the Securities Industry: Underwriters, Brokers, Dealers, Investment Advisors, and others
Understanding the roles of FINRA and the
SEC in regulating the conduct of Broker/Dealers
How does the Exchange Act regulate securities market participants other than issuers?
Reminder NO CLASS NEXT WEEK
6
10/19 Text:
• Chapter 11 §§11.3 Investment Adviser
Regulation and §§11.4 Mutual Fund
Regulation
Read:
• https://www.sec.gov/news/studies/2011/913studyfinal.pdf
Presentation: Team 4
EXAM PREP REVIEW
7
10/26
EXAM 1
[Updated 09.04.2021 FT]
PAGE 8
How are investment companies regulated?
How is the regulation of investment companies different from other securities market
participants?
How are investment advisers regulated?
How are investment advisers different from
broker-dealers?
What are the reasons credit rating agencies
are regulated?
Mutual funds and the Investment Company
Act of 1940: What is a registered investment company? How does it differ from a
“hedge fund” or “private equity fund”?
Understanding how the Investment Advisers
Act of 1940 regulates the conduct of Investment Advisor
8
11/2
Text:
• Chapter 8, §§8.3 – 8.33 Regulation of
Public Companies
• Chapter 8, §§8.4 – 8.4.4 Proxy Regulation (A Summary)
• Chapter 8, §§8.5 – 8.5.4 Regulation of
Tender Offers (A Summary)
• Chapter 1, §§1.4 -1.4.2 Beyond Disclosure: Federal Incursions into Corporate Governance
• Chapter 8, §§8.3.4 – 8.3.5 Oversight of
Corporate Misconduct
Presentation: Team 5
Presentation: Team 6
9
11/9
Text:
• Chapter 9 Rule 10b-5
Cases:
1) Kardon v. National Gypsum Co. (E.D.
Pa. 1946)
2) Blue Chip Stamps v. Manor Drug
Stores (U.S. 1975)
3) Matrixx Initiatives, Inc. v. Siracusano
(U.S. 2011)
4) In re HP Secs. Litig. (N.D. Cal. 2013)
5) Central Bank of Denver v. First Interstate Bank of Denver (U.S. 1994)
6) Dura Pharmaceuticals v. Broudo (U.S.
2005)
7) Erica P. John Fund Inc. v. Halliburton
Co. (U.S. 2011) Fed.R.Civ.P., Rule 23
Presentation: Team 7
Presentation: Team 8
[Updated 09.04.2021 FT]
PAGE 9
Public company registration and reporting requirements
Registration requirements, holders of record,
exchange listing
Reporting — What forms must an issuer use
to comply with the reporting requirements of
the Exchange Act?
What information must be included in SEC
form filings?
How does an issuer determine what information to include in a required securities filing/disclosure document?
Proxy Disclosure
The Williams Act — 5% Stock Acquisitions
and Tender Offers
Sarbanes Oxley and Dodd-Frank: Substantive
regulation of issuers — use of disclosure and
listing requirements to affect corporate governance structures and ethics codes
Understanding the ways in which SOX regulates issuers
Understanding ways in which Dodd-Frank
regulates issuers
Rule 10b-5 — Origins and Overview
Origins
Private cause of action, standing?
Scienter and materiality
Reliance, loss causation and secondary liability
What is the “Fraud on the Market” Theory?
What are the requirements for certification of
a securities class action?
SEC Enforcement
Write up 1 of the above 7 cases
10
11/16 Text:
• Chapter 10 Insider Trading
Cases:
1) Chiarella v. U.S. (1980)
2) U.S. v. O’Hagan (only through p. 666
of opinion)
3) Dirks v. SEC
4) United States v. Martoma (2d Cir.
2017)(dissent only)
Presentation: Team 9
Presentation: Team 10
Write up 1 of the above 4 cases
11
11/23 Read:
•
•
Whistleblower law
18 U.S.C. §1514A (SARBOX)
15 U.S.C. § 78u-6 (Dodd-Frank Act)
Cases:
1) Berman v. [email protected] LLC
https://www.sec.gov/about/offices/owb/owb-resources.shtml
2) Digital Realty Trust, Inc. v. Somers:
https://www.supremecourt.gov/opinions/17pdf/16-1276_b0nd.pdf
Presentation: Team 11
Presentation: Team 12
Write up 1 of the above 2 cases
[Updated 09.04.2021 FT]
PAGE 10
Insider Trading
What is insider trading? When is it illegal?
What are the penalties for illegal insider trading? How is the law enforced?
How was insider trading defined in Chiarella?
How did O’Hagan expand government regulation of insider trading?
When is a “tippee” guilty of illegal insider
trading?
When is a “tipper” guilty of illegal insider
trading?
Corporate obligation to prevent illegal insider
trading
Compare: Exchange Act Section 16(b) — Insider stock ownership reporting and shortswing profits liability.
Whistleblower protections under the securities laws
What is a “whistleblower” and why does it
need protection?
Understanding the different definitions and
remedies for retaliation under SOX and the
Dodd-Frank Act
Does internal whistleblowing qualify for antiretaliation protection?
The Dodd-Frank Act’s Bounty Program
12
11/30
Read:
DOJ-SEC Guide to the FCPA
https://www.sec.gov/spotlight/foreigncorrupt-practices-act.shtml
Recordkeeping and internal controls provisions of the FCPA:
https://www.sec.gov/spotlight/fcpa/fcparecordkeeping.pdf
FINCEN, Bank Secrecy Act,
https://www.fincen.gov/resources/statutes-regulations/guidance/sharing-suspicious-activity-reports-securities-broker
Office of Foreign Assets Control, Sanctions Regulations
U.S. Department of the Treasury, Bank
Secrecy Act Regulations, 31 CFR
1010.320
FinCen, Guidance on Preparing a Complete and Sufficient Suspicious Activity
Report Narrative (Nov. 2003)
Federal Deposit Insurance Act, Sections
3(q) and -(u), 8(b), -(e), -(g), and -(i)12
U.S.C. §§ 1813(q), -(u), 1818(b), -(e), -(g)
and -(i)
Bank Holding Company Act, 12 U.S.C.
§§1843(c)(8), 1851
Presentation: Team 13
Presentation: Team 14
[Updated 09.04.2021 FT]
PAGE 11
Foreign Corrupt Practices Act:
§13: Applicability of FCPA to public companies with domestic-only activities
Should the U.S. be regulating conduct outside of its borders?
What is something of value?
What level of intent is required to violate
FCPA?
Foreign Corrupt Practices Act: Realities of
Enforcement
FINCEN and the Bank Secrecy Act
“Suspicious Activity Reports” and their handling
OFAC and Foreign Sanctions Regulations
Federal Banking Laws governing securities
activities of commercial banks: GlassSteagall Act, Gramm-Leach-Bliley Act,
Bank Holding Company Act and the
Volcker Rule
Bank regulatory agency enforcement powers
“Institution-affiliated parties”
13
12/7
Text:
• Chapter 9 Racketeer Influenced and
Corrupt Organizations Act, §9.5.3
• Chapter 12, Criminal Enforcement,
§§12.5 – 12.5.6
Read:
• 18 U.S.C. Section 1348
• U.S. Sentencing Guidelines §8B2.1
(Effective Compliance & Ethics Program)
• U.S. Attorneys Manual 9-28.000
(Prosecution of Business Organizations)
Cases:
1) U.S. v. Kaiser (2d Cir. 2010)
2) Boyle v. U.S. (U.S. 2009)
3) U.S. v. Milikowsky (2d Cir. 1995)
4) U.S. v. Ebbers (2d Cir. 2006) (just
sentencing portion of opinion)
5) “Yates Memorandum” (U.S. DOJ
9/9/2015)
Presentation: Team 15
Write up 1 of the above 5 cases
Current Event Paper Due
EXAM PREP REVIEW
14
12/14 EXAM 2
A.
[Updated 09.04.2021 FT]
PAGE 12
Criminal Liability for Violations of Financial Regulatory Statutes — Criminal Securities Fraud: When does a violation become
criminal?
Understanding the far reach of federal prosecutors — How Federal prosecutors use of
mail and wire fraud, RICO and criminal tax
prosecutions to reach wide range of financial corruption and “white collar” crimes
Can an organized crime law be used against
a legitimate business?
Difference between civil and criminal RICO
What is an “enterprise” for the purposes of
RICO?
What steps can and should a public company take to best protect itself and its directors, officers and employees from criminal
prosecution?
What factors do Federal prosecutors and
judges take into account in sentencing corporations and “white collar criminals” convicted violations of the securities laws or
other criminal offenses?
Should the sentencing judge consider impact
on a defendant’s business in sentencing?
Is it reasonable to consider loss to shareholders in calculating defendant’s sentence?
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