SECURITIES AND MARKETS REGULATION
LLM LAW & FINANCE 2023-24 | UNIVERSITY OF AMSTERDAM
Including tutorial notes + readings
, 0. EXAM REMEMBER
Lecture 1. Functions of Securities and Markets Regulation
- Market failures: information asymmetry, public goods, negative externalities, behavioural
biases and imperfect competition
- Zingales: problem statement of trust issue changing from unsophisticated investors being
defrauded by knowledgeable insiders, to trust towards institutional investors who lack
accountability. Today, securities markets regulation should focus on corporate governance
and solve conflicts of interests and hold managers more accountable.
- Regulation: need it to increase trust (market participation, credibility), lower entry
barriers and have more competition and standardisation of norms
⇒ trying to tackle information asymmetry and agency conflicts
- Limitations: procyclicality and regulatory biases (informational, psychological and
under political and social pressure)
Lecture 2. Limits of Regulation and EU SMR
- Challenges to regulation: regulatory arbitrage, informational challenge (solution of
principles based regulation but subject to regulatory capture as well), politics (procyclicality
and regulatory capture), and regulatory architecture (institutional, functional, objectives-based
and unitary)
- US approach: investment contract when (1) investment of money, (2) expectation of
products from the investment, (3) investment in a common enterprise, (4) any profits comes
from the efforts of a promoter or third party
Lecture 3. Mandatory disclosure
- Reasons for mandatory: (1) underproduced because it is a public good and positive
externalities so people would be free riding, (2) insider incentives such as managerial bias,
lobster trap and conflicts of interests, (3) standardisation to allow better comprehensibility and
comparability
Lecture 4. Market integrity and insider trading
- Reasons why private market not enough: undersupply in private markets of information
because of free riding and competition leading to race to the bottom
- US and EU differences in ongoing disclosure regime:
- US: periodic, material info, room for voluntary, no deception / fraud approach, no
selective, high enforcement and penalties, safe harbours
- EU: ongoing, any information, parity of information approach, no selective, less
enforcement and no safe harbours because no room for voluntary
- Arguing for inside trading: improves informational efficiency (Henry Manne) and there is
no parity of information (retail investors don’t matter for informational efficiency)
, - Challenges to market manipulation regulation: sophisticated and complex practices,
constantly evolving and regulatory arbitrage, interconnection of markets → hard to define
what is actually market manipulation and can have positive ones as well to correct
information
Lecture 5. Investor protection
- Markets-self correction mechanisms: (efficiency contracts and marginal consumer) +
secondary markets [but lack of diversification and investors think they can beat the market] +
advice by investment firms [but asymmetric information and taking advantage of it +
consumers don’t pay for advice, overconfidence and budget constraints]
Lecture 6. Gatekeepers and Crowdfunding
- Gatekeepers examples:
Underwriters Securities Analysts CRAs
Functions - place financial - synthesise raw info - certify info about
instrument in primary about specific issuers probability of default →
market on (i) firm - issue recommendation gate opener because
commitment or (ii) best
effort basis allow access to market
- pricing in primary - issue opinions (BUT
market from secondary not pricing!)
markets expectations
Economic - Certification services as - Buy: incentive to - Issuer pays to avoid
rationale repeated play produce proprietary info free riding
- Bookbuilding - Sell: free riding so subs - Regulatory license
Success / S: little conflict of F: conflicts F: conflicts
failure interest from issuer-pays - incentive to advice - concentrated market
model because + retail excessive trading - regulatory license (not
and institutional getting - biased pricing requiring reputation)
same price → because want trading
Regulation 1. Need Authorisation 1. Need authorisation 1. Need to be registered,
- investment firm - ancillary services in subject to ESMA
- provide invest services MiFID oversight
- CoB rules - CoB rules 2. Disclosure of rating
2. Insider trading 2. Disclosure objectively methodology
prohibited unless with presented 3. Manage conflicts of
internal arrangements 3. Manage disclosure interests
3. Management and conflicts + inducement 4. Liability if specific
disclosure of conflicts of prohibition but lifted infringement + gross
interest negligence + reliance
5. Competition ensured
6. Overreliance
- Benefits and costs of crowdfunding: good because advantages for the economy, project
owners and democratising it more, but bad because it gives chances of fraud, misleading ads,
LLM LAW & FINANCE 2023-24 | UNIVERSITY OF AMSTERDAM
Including tutorial notes + readings
, 0. EXAM REMEMBER
Lecture 1. Functions of Securities and Markets Regulation
- Market failures: information asymmetry, public goods, negative externalities, behavioural
biases and imperfect competition
- Zingales: problem statement of trust issue changing from unsophisticated investors being
defrauded by knowledgeable insiders, to trust towards institutional investors who lack
accountability. Today, securities markets regulation should focus on corporate governance
and solve conflicts of interests and hold managers more accountable.
- Regulation: need it to increase trust (market participation, credibility), lower entry
barriers and have more competition and standardisation of norms
⇒ trying to tackle information asymmetry and agency conflicts
- Limitations: procyclicality and regulatory biases (informational, psychological and
under political and social pressure)
Lecture 2. Limits of Regulation and EU SMR
- Challenges to regulation: regulatory arbitrage, informational challenge (solution of
principles based regulation but subject to regulatory capture as well), politics (procyclicality
and regulatory capture), and regulatory architecture (institutional, functional, objectives-based
and unitary)
- US approach: investment contract when (1) investment of money, (2) expectation of
products from the investment, (3) investment in a common enterprise, (4) any profits comes
from the efforts of a promoter or third party
Lecture 3. Mandatory disclosure
- Reasons for mandatory: (1) underproduced because it is a public good and positive
externalities so people would be free riding, (2) insider incentives such as managerial bias,
lobster trap and conflicts of interests, (3) standardisation to allow better comprehensibility and
comparability
Lecture 4. Market integrity and insider trading
- Reasons why private market not enough: undersupply in private markets of information
because of free riding and competition leading to race to the bottom
- US and EU differences in ongoing disclosure regime:
- US: periodic, material info, room for voluntary, no deception / fraud approach, no
selective, high enforcement and penalties, safe harbours
- EU: ongoing, any information, parity of information approach, no selective, less
enforcement and no safe harbours because no room for voluntary
- Arguing for inside trading: improves informational efficiency (Henry Manne) and there is
no parity of information (retail investors don’t matter for informational efficiency)
, - Challenges to market manipulation regulation: sophisticated and complex practices,
constantly evolving and regulatory arbitrage, interconnection of markets → hard to define
what is actually market manipulation and can have positive ones as well to correct
information
Lecture 5. Investor protection
- Markets-self correction mechanisms: (efficiency contracts and marginal consumer) +
secondary markets [but lack of diversification and investors think they can beat the market] +
advice by investment firms [but asymmetric information and taking advantage of it +
consumers don’t pay for advice, overconfidence and budget constraints]
Lecture 6. Gatekeepers and Crowdfunding
- Gatekeepers examples:
Underwriters Securities Analysts CRAs
Functions - place financial - synthesise raw info - certify info about
instrument in primary about specific issuers probability of default →
market on (i) firm - issue recommendation gate opener because
commitment or (ii) best
effort basis allow access to market
- pricing in primary - issue opinions (BUT
market from secondary not pricing!)
markets expectations
Economic - Certification services as - Buy: incentive to - Issuer pays to avoid
rationale repeated play produce proprietary info free riding
- Bookbuilding - Sell: free riding so subs - Regulatory license
Success / S: little conflict of F: conflicts F: conflicts
failure interest from issuer-pays - incentive to advice - concentrated market
model because + retail excessive trading - regulatory license (not
and institutional getting - biased pricing requiring reputation)
same price → because want trading
Regulation 1. Need Authorisation 1. Need authorisation 1. Need to be registered,
- investment firm - ancillary services in subject to ESMA
- provide invest services MiFID oversight
- CoB rules - CoB rules 2. Disclosure of rating
2. Insider trading 2. Disclosure objectively methodology
prohibited unless with presented 3. Manage conflicts of
internal arrangements 3. Manage disclosure interests
3. Management and conflicts + inducement 4. Liability if specific
disclosure of conflicts of prohibition but lifted infringement + gross
interest negligence + reliance
5. Competition ensured
6. Overreliance
- Benefits and costs of crowdfunding: good because advantages for the economy, project
owners and democratising it more, but bad because it gives chances of fraud, misleading ads,
