Rethinking Securities Law

My recently published book, Rethinking Securities Law (Oxford University Press 2021) (ISBN 978-0-19-758314-2), focuses on many key aspects of securities regulation and recommends meaningful reforms that should be implemented. The book addresses such fundamental subjects as the disclosure regimen of the federal securities laws, exempt offerings (for issuers as well as in the resale setting), the Securities Act registration framework, corporate governance, private securities litigation, insider trading, mergers and acquisitions, and the SEC itself. The book’s final chapter provides a summary of recommendations for adoption, numbering about 125 such recommendations.

Insofar as I am aware, this book is the first comprehensive treatment of revising the securities laws since the American Law Institute’s adoption of the Federal Securities Code over four decades ago. The book’s objective is to identify the deficiencies that currently exist, address their failings, proffer recommendations for correcting these deficiencies, and set forth an analytical prescription for remediation in an effort to espouse a sound and coherent securities law framework.

I am pleased thus far with the reaction to the book. For example, former SEC Chairman Harvey Pitt states: “For anyone who cares about strengthening capitalism, improving the efficiency of our capital markets, and protecting investors, Professor Marc Steinberg’s creative and thought-provoking book Rethinking Securities Law is a must read.” Professor Stephen Bainbridge of UCLA opines that Rethinking Securities Law “should be a strong candidate for law book of 2021….” And former SEC General Counsel Ralph Ferrara states: “… By substantially enhancing the rules-based consolidation of six separate securities statutes advocated by the American Law Institute, Steinberg has formulated an ecosystem of fairness and excellence to sustain access and exchange in our capital markets.”

The recommendations made in the book certainly will generate controversy and disagreement. Given the broad scope and impact of the recommendations proffered, this is to be expected. A sampling of the recommendations made follows.

When Congress passed the Sarbanes-Oxley Act in 2002, it directed the SEC to mandate that publicly-held companies disclose on a “rapid and current basis” additional information reflecting “material changes” in their financial condition or operations. Rather than adopting the approach of several developed markets (such as the European Union) and the U.S. national securities exchanges whereby all material information must be timely disclosed absent the existence of justifiable business reason, the Commission opted to expand the items called for by Form 8-K. The result is that issuer nondisclosure of material nonpublic information prevails in far too many situations, impairing the efficiency of price discovery in the securities markets and slighting investor interests. The solution is for the SEC to require that Exchange Act reporting companies, absent justifiable business reason, timely disclose all material information to the securities markets and the investing public.

Information “overload” prevails in the U.S. disclosure framework. SEC filings are voluminous, creating an insurmountable hurdle for the ordinary investor to effectively utilize. A practical and easily implemented measure to enhance investor understanding is available; namely, the requirement that Exchange Act companies in specified filings (such as Securities Act registration statements and SEC Form 10-K and 10-Q reports) include a Summary Section in the front part of the filing. Undoubtedly, this requirement will cause concern among companies, their insiders, and legal counsel of enhanced liability exposure. Nonetheless, the use of a Summary Section already is used in a number of instances. The universal application of this practice would instill greater discipline in the disclosure process and prove beneficial to investors who understandably do not have several hours at their disposal to study the SEC filings for each of their investments.

This problem is exacerbated due to the incorporation by reference of Exchange Act filings into an issuer’s registration statement. The rationale underpinning this practice is the efficient market theory whereby a company’s stock price already has absorbed the information set forth in the previously-filed SEC periodic reports, thereby making it unnecessary for that information to be repeated in the registration statement. While this practice has merit for efficiently-traded stocks, it has no justification with respect to companies whose securities trade in inefficient markets. Yet, incorporation by reference has been expanded through the decades to include these less than stellar companies. This practice should stop. Incorporation by reference should be permitted only if an issuer can establish that its securities which are the subject of the registered offering in fact trade in an efficient market.

Another problematic subject is the Commission’s refusal to adjust upward the monetary level for individual accredited investor qualification. The $1 million net worth or $200,000 annual income level has remained stagnant while the Commission has expanded the scope of the private offering exemptions. Admitting that it has declined to do so because it may impair private capital raising, the SEC has favored capital formation over investors. This conduct speaks ill of a regulatory agency charged with investor protection. The solution is for the Commission to adjust for inflation the accredited investor amounts that were adopted in 1982 to 2021 monetary levels. In addition, irreplaceable assets, such as an individual’s retirement accounts, should be excluded from the accredited investor calculation.

As a final example, the insider trading framework that exists in this country is unacceptable. Similarly situated persons are treated differently for no rational reason. Indeed, no other developed market has adopted our framework. A number of measures should be implemented. For one, a comprehensive access approach should be legislatively enacted whereby those persons who have access to material nonpublic information not available to the securities markets cannot trade on or tip others that information. Second, the current Rule 10b5-1 insider trading plan framework has been abused and needs to be meaningfully revised. And third, because insiders routinely have more relevant information than others, they should be permitted to trade their companies’ securities only after filing a Form 4 with the SEC. The current practice that requires insiders to disclose their trades two business days after their transactions allows officers and directors to be at the front of the queue. As fiduciaries and having more information than shareholders, advance notification should be required. After such notification is properly made, an insider may trade the next business day if otherwise legally compliant.

The foregoing provides a few examples of the recommendations that are made in Rethinking Securities Law. Based on my over forty-year career as a securities law academician and practitioner, the book was a challenging and stimulating project. My hope is that it helps to bring about meaningful law reform that will improve our securities markets and investor protection.