Teaching Securities in Law School (Part 2)
So what can be done differently in a securities class?
Obviously, a class as broad as securities can be taught in an infinite number of ways. My class has always had a section on market structure (mostly discussing the role of FINRA and broker arbitration and the stock exchanges, including the consequences of their shift to for profit companies).
This year, however, I had students read the excerpt from Flash Boys that was published in the NYT. The topic facilitated a discussion of market structure that at least introduced the idea of market fragmentation, high frequency trading, the national market system, dark pools and a cursory overview of some of the requirements of Regulation NMS. Later in the semester, we will spend a day on Regulation ATS (the primary regulatory framework for dark pools) and Regulation NMS. To the extent that more suits are brought (either by private parties or government agencies) during the semester in these areas, we will discuss them in class.
The class will also deliberately focus on Rule 10b-5 and not on Section 11 or 12 of the 1933 Act (both will, however, be mentioned). Rule 10b-5 requires an analysis of the basics of any false disclosure claim including materiality and concepts such as completeness. Unlike Section 11, it requires some discussion of causation, reliance and scienter. Scienter in turn requires some discussion of the standards set out in the PSLRA.
To make room for some of these topics, things had to be cut. The main place that I reduced coverage was in connection with the exemtions from registration. The SEC has studied the use of exemptions and it is quite clear that almost all exempt offerings are conducted under Rule 506 of Regulation D. So in my class, there will be a mention of the others, but a detailed examination of an exemption will only take place with respect to Rule 506. Of course, Rule 506 builds in many of the requirements that are relevant to the other exemptions, including accredited investors, general solicitations, and bad actor provisions. For students who want more, we offer a class on capital raising that examines the exemptions in greater detail.
As much as I enjoy the law of insider trading (mostly because of its bizarre nature), I dropped the topic from the class this year and expanded the discussion of the proxy rules. I added in short exercises that required students to access proxy statements and pull out shareholder proposals or compensation tables. My thought was that every exchange traded company must distribute a proxy statement and every other public company must distribute a proxy or information statement. As a result, students who go on to represent public companies (particularly small public companies) will likely be participating in the drafting and/or review of the proxy statement. Greater familiarity with these rules seems useful.
Perhaps the biggest omission from the class, in my opinion, is any serious examination of the Investment Company Act and the regulation of mutual and hedge funds. We offer a separate class that examines regulated industries including these entities but for now they are not covered by the basic securities class. Perhaps when I plan my course for next year, this will change.
All of this makes it difficult to find a good textbook (I use my book on Corporate Governance mostly because it has sections on market structure, particularly the role of the exchanges, although they will need to be updated in the next version). Nonetheless, I provide current supplemental material over TWEN. Students read some of the releases that altered the definition of accredited investor (by excluding equity from the house) and that adopted the "reasonable steps" standard under Rule 506.
Nonetheless, this is a class that, I think, can never be taught exactly the same way twice. But getting a correct mix that is both useful and current is not easy. Any thoughts or comments on this would be greatly appreciated.