In a paper titled “The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews,” authors Miguel Euro, Jonas Hesse and Gaizka Ormazabal study the effects of the change in policy by the Securities and Exchange Commission (SEC) in 2004 to make comment letters publicly available. The disclosure of comment letters allows market participants to impose market discipline. Institutional investors in particular are attentive to comment letters, especially those related to financial reporting matters. The authors test their thesis by reviewing changes in financial reporting in the earnings periods following the publication of comment letters. The authors look at all comment letter reviews from 1998 to 2013. Following receipt of comment letters that are subsequently publicly disclosed, earnings reports are more informative (for example, contain longer narratives), more transparent and have a lower likelihood of restatements. Also, interestingly, when comment letters were available only by FOIA request, the effect of comment letters was less pronounced. This suggests that market discipline results from companies knowing that institutional investors will monitor comment letters and ask questions, and, as a result, companies improve the quality of their reports. In effect, market discipline reinforces the regulatory scrutiny. The authors also comment in passing on the fact that following the change in policy by the SEC the number of comment letters and number of comments declined. The authors attribute this to the adoption of the Sarbanes-Oxley Act at around the same time. However, it may be attributable in part to the fact that preparers of SEC reports may be better informed by reviewing publicly available comment letters and considering the applicability of such comments to the filings they are preparing. Access to the full paper can be found here:

The Office of the Investor Advocate released its “Report on Activities for the Fiscal Year 2018” (the “Report”). During the 2018 fiscal year, the Investor Advocate focused significant attention on proposed Regulation Best Interest and on the standard of conduct applicable to broker-dealers and investment advisers. In the Investor Testing section of the Report, the Office summarized some of the key findings from its survey, “Research on the Market for Investment Advice.” These findings, which are summarized below, should help inform the Commission’s consideration of proposed Regulation Best Interest:

Most investors do not currently receive financial advice regarding their assets. Consumers were asked whether they are currently consulting a financial professional regarding their investment strategies, the type of account to open, or specific financial investments. The aim of these questions was to determine the percentage of investors that receive financial advice from professionals. Only 38.7% of consumers responded “yes” to one or more of these questions. This research shows that the majority of investment decisions are not informed by professional advice. The cost associated with finding and screening an investment professional was among the leading reasons that investors cited for not seeking professional advice. The finding that the majority of investment decisions are not professionally informed may be a cause of concern for regulators.

Most consumers of investment advice turn to “dual-hatted” professionals. The majority of financial advice consumers receive is delivered by a dual registered broker-dealer and investment adviser. Only 3.8% of advice seekers work with a professional that is exclusively registered as a broker-dealer. The majority of consumers were unable to identify the correct legal status of their financial professional.

The general public does not understand the obligations arising from the requirement to act in the customer’s “best-interest.” A survey of investor understandings of the term “best interest” found that 73% of investors believe that the reference to “best interest” requires financial professionals to help them choose the lowest cost product; all else being equal, 6.1% thought that it required professionals to avoid taking higher compensation for selling one product when similar but less costly products are available, and 86% thought that it required professionals to monitor their account on an ongoing basis. However, the proposed best interest standard applies to broker-dealers who are generally not required to actively monitor accounts as part of their service offerings. Furthermore, it is unclear whether the best interest standard would require professionals to choose the lowest cost product.


In a recent paper titled, “Public or Private Venture Capital?” author Darren M. Ibrahim compares the relative benefits associated with reliance on private capital to fund start-ups and emerging companies with “public” venture capital in the form of securities exchanges like the London Alternative Investment Market, or AIM. The author looks at three such venture exchanges, the AIM, the German Neuer Markt, or NM, and Hong King’s Growth Enterprise Market, or GEM. The author did not use the Toronto Venture Stock Exchange because most of the listed companies are not technology-based companies. None of the three exchanges examined has proven as successful an approach to funding emerging companies as has the US venture capital model. The paper notes that in connection with investing in earlier stage companies, there are information asymmetry issues as well as agency costs. The author notes that, in part, the failures of each such exchange may be attributed to the manner in which these exchanges addressed information asymmetries and agency issues. In the case of the exchanges, corporate and securities law requirements were relied upon. In the US venture model, VCs rely on private contractual arrangements and staged financings to reduce asymmetries. Over time, the US venture model has proven to be more effective in funding successful growth companies. Proponents of capital markets reforms regularly recommend that US policymakers consider venture exchanges despite the lack of success of venture exchanges outside the United States. See full report here:

In this year’s priorities letter identifying the areas of focus for FINRA examinations during the year, FINRA notes that it will review online distribution platforms. Specifically, the letter notes that some firms are involved in the distribution of securities pursuant to Rule 506(c) and Regulation A under the Securities Act. FINRA notes that in some cases platforms may be owned by entities that are not broker-dealers but may engage broker-dealers to perform specific functions, such as custodial, escrow or back office functions. FINRA will evaluate the role of such entities. Similarly, FINRA notes that some firms claim not to be involved in selling or recommending securities despite their involvement in distributions and their receipt of transaction-based compensation. FINRA notes it will evaluate how firms operating platforms: discharge their suitability obligations, meet AML requirements, supervise communications, vet offering materials, and assess investor status. The 2019 FINRA Priorities Letter can be found here:

In “Squaring Venture Capital Valuations with Reality,” authors Will Gornall and Ilya Strebulaev developed a valuation model for venture capital-backed companies that relies on terms of financing rounds that were gleaned from public filings. Using these reported valuations, the authors then calculate values for all share classes for each of the 135 US unicorns in the study sample set. In doing so, the valuation of shares of common stock is adjusted down to reflect the fact that reported valuations relate to preferred stock and the holders of preferred stock receive significant contractual and economic benefits that are not shared by the common stock. The authors point to certain valuation practices that may lead to incorrect conclusions, such as the post-money valuation approach often used by VC funds. Also, the authors note that often in arriving at valuations, the valuation may be based on the value of the most recently issued series. Usually the most recently issued series of preferred stock is senior to all previously issued and outstanding series of preferred stock, making prior series less valuable by comparison, but instead many models would ascribe the per share valuation of that senior security to every share of the other series. Using their valuation model, the authors find that 65 of the 135 unicorns lose their status as unicorns when considered based on fair value. The authors note that a lack of information regarding the differing contractual terms associated with the outstanding series of stock contributes to the overvaluation. The lack of transparency may be problematic as private secondary markets continue to grow, and as ownership of stock in privately held companies becomes dispersed. The full report can be accessed here:

In a recent paper, “Scaling Up: the Implementation of Corporate Governance in Pre-IPO Companies,” authors David F. Larcker and Brian Tayan review governance practices and how these evolve in the lead-up to an IPO. The authors studies 47 companies that completed IPOs from 2010 to 2018. On average, the companies in the sample set were nine years old at the time of their IPO. Though the authors note that there was great variability among the sample set in terms of the governance systems that were in place at the time of their IPOs, they were able to observe a number of common milestones. Almost all of the companies said they became focused on corporate governance in connection with planning for an IPO and that process, on average, began three years prior to the IPO. Also, generally at that time, the companies recruited their first independent directors. On average, prior to the IPO, companies added three independent directors. Approximately 77% of the sample set had a staggered board at the time of IPO. In approximately 53% of the surveyed companies, the founder served as the CEO at the time of the IPO. Those companies that brought in a non-founder CEO prior to the IPO did so in order to address some perceived managerial or commercial problem. The CFO who took the company public was on average hired three years prior to the IPO. Given the growth in the number of unicorns and the increasingly dispersed ownership of pre-IPO companies, it is surprising that governance practices have not changed much for these companies and that pre-IPO institutional holders do not press for more significant governance changes. The full paper can be accessed here:

On January 18, 2019, Congresswoman Maxine Waters and Congressman Patrick McHenry introduced legislation that would require the Securities and Exchange Commission (the “Commission”) to carry out a study of Rule 10b5-1 trading plans. Rule 10b5-1 trading plans are passive investment agreements that provide an affirmative defense for companies and insiders (directors, officers and affiliated shareholders) transacting in the relevant company’s securities from claims brought under the Exchange Act. Currently, any person or entity can establish a Rule 10b5‐1 trading plan to sell or buy a company’s securities at a time when the person or entity is not aware of any material non-public information relating to the company. The study would review whether Rule 10b5-1 should be amended to:

  • limit the ability to adopt a trading plan to a time when the company or insider is permitted to buy or sell securities during issuer-adopted trading windows;
  • limit the ability of companies and insiders to adopt multiple trading plans;
  • establish a mandatory delay between the adoption of a trading plan and the execution of the first trade made pursuant to such plan;
  • limit the frequency with which companies and insiders may modify or cancel trading plans;
  • require companies and insiders to file adopted trading plans with the Commission; and
  • require boards of companies to adopt policies covering trading plans and monitor trading plan transactions

The Commission would be required to issue a report within one year of the adopted legislation and revise Rule 10b5-1 based on the study’s results. A copy of the legislation can be found using the below link:


On January 10, 2019, the staff of NYSE Regulation released its annual memorandum detailing important rules and policies applicable to listed companies. The memorandum provides helpful reminders for issuers (noting important rule differences for domestic and foreign private issuers) with securities listed on the NYSE and also highlights new compliance items. In particular, as previously announced, the memorandum notes that NYSE-listed companies are now required to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of NYSE trading hours. Additionally, NYSE-listed companies are now no longer required to provide physical copies of proxy materials to the NYSE if such proxy materials are publicly filed with the Securities and Exchange Commission (“SEC”) on EDGAR. The memorandum also provides important reminders specific to foreign private issuers, including with respect to semi-annual reporting. NYSE-listed foreign private issuers are required to submit a Form 6-K to the SEC containing semi-annual unaudited financial information no later than six months following the end of the company’s second fiscal quarter. The memorandum also includes the latest NYSE staff contact information for purposes of complying with notification requirements and contacting the NYSE in the event material news is released. A copy of the full memorandum can be obtained by clicking here.

On December 21, 2018, the Securities and Exchange Commission (the “SEC”) appointed Martha Legg Miller as the Advocate for Small Business Capital Formation. As the first individual appointed to the new role, Miller will assist small businesses in accessing and navigating capital markets and identify the challenges that they face in doing so. Additionally, Miller will suggest regulatory changes to better accommodate the interests of small businesses. The position was created along with the Office of the Advocate for Small Business Capital Formation under the SEC Small Business Advocate Act of 2016. The SEC created the new role and office to better represent the needs of small businesses in accessing capital, while continuing to ensure investor protection. The SEC press release covering the appointment can be found here.

Before the SEC shutdown, the Office of the Investor Advocate published the annual report on its activities during 2018. The report addresses non-GAAP financial measures and key performance indicators. The report notes that some investors find value in non-GAAP financial measures; however, others are troubled by inconsistent and changing disclosures and would like to see greater standardization that would permit comparisons to be more easily made. The report suggests continue attention be paid to the metrics used by public companies, and I how these are prepared and presented period to period. The report also addresses the Advocate’s focus during the year on problematic investment products, such as initial coin offerings, and increasing use of margin debt. The full report can be accessed here: