On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.
- Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using
… Read more
When it comes to corporate litigation, is more necessarily better? The legal system has developed a broad array of litigation options to address corporate wrongdoing. Under state law, shareholders can file a derivative suit or class action alleging that directors and officers breached their fiduciary duty. Under federal law, shareholders can file a securities class actions alleging that the directors and officers misled the market. These private lawsuits are often filed alongside government enforcement actions brought by the Securities & Exchange Commission, the Department of Justice, or state regulators.
In our article, Piling On: An Empirical Study of Parallel Derivative … Read more
A January 2016 study, Short-Term Investors, Long-Term Investments, and Firm Value, by Martijn Cremers, Ankur Pareek and Zacharias Sautner, provides substantial “empirical” evidence for the fact that, in the current corporate governance environment, short-term investors possess the undue ability to pressure companies into maximizing near-term gains at the expense of long-term growth.
The study finds that after short‐term investors become shareholders of companies, those companies tend to decrease spending on R&D, and tend to experience temporarily increased earnings and stock prices. The results further indicate that when the short-term investors leave, these trends are all reversed, “so that … Read more
On May 18, 2012 Facebook (FB) held its initial public offering (IPO) on NASDAQ, raising over $16 billion making it one of the largest IPOs in history. To the surprise of many investors, there was almost no underpricing, as the stock closed the first day of trading almost flat from its offer price. The IPO was described as not only disappointing but also detrimental to the broader market in the financial press. The “failed” FB IPO was blamed for causing everything from mutual funds’ declines in assets under management to significant increases in IPO underpricing, to subsequent canceled IPOs. We … Read more
In order to investigate what (and how much) is being reported in annual proxy statements about executive pay packages and how incentive pay is designed, Arthur J. Gallagher & Co.’s Human Resources & Compensation Consulting Practice (formerly James F. Reda & Associates a Division of Gallagher Benefit Services, Inc.), has conducted a study of the 2015 annual proxy statement disclosures for 200 of the top U.S. companies (based on revenue and market capitalization). This is the seventh consecutive year we have conducted this in-depth analysis for the top-200 public companies.
It has been almost five years since the Dodd-Frank Wall … Read more
During most of Steve Job’s tenure as CEO of Apple Inc. the company did not have any long-term debt obligations. Apple started an aggressive buyback program only after Tim Cook took over, at the same time that it added debt to its capital structure. Coincidentally, San Francisco, where Steve Jobs was born, experienced more disaster-related fatalities during Jobs’ formative years than Tim Cook’s birthplace of Mobile, Alabama. Could this anecdote be indicative of a deeper pattern, where personal experience of traumatic events shapes how a person views financial risk-taking?
A manager’s ability to assess and cope with risk has pervasive … Read more
On January 22, 2016, Chancellor Andre Bouchard of the Delaware Court of Chancery issued an important decision in In re Trulia, Inc. Stockholder Litigation—likely hammering the final nail in the coffin of “disclosure-only” settlements with broad releases of liability in M&A stockholder lawsuits in the Court of Chancery. There could, however, be an increase in “mootness fee” applications resulting from stockholder lawsuits that are voluntarily dismissed following any supplemental disclosures defendants may voluntarily provide. Stockholder plaintiffs (and their lawyers) may use this vehicle to continue filing lawsuits challenging M&A transactions, albeit not in the same volume that has been … Read more
Mutual funds are becoming more like hedge funds as a matter of investment strategy while hedge funds are becoming more like mutual funds as a matter of the regulatory framework. The growth of the private fund industry and the proliferation of retail alternative funds in combination with the fundamental regulatory reform of the private fund industry through the Dodd-Frank Act and the JOBS Act make the convergence of mutual and private funds possible. Such convergence has large implications for the evolution of the private fund industry and the growth of the retail alternative fund market.
For most of their history, … Read more
The year 2015 marked the fifth anniversary of passage of the Dodd-Frank Act and, for many private fund managers, the third anniversary of SEC registration under the Investment Advisers Act. The past year also saw a number of notable SEC regulatory trends and developments affecting private fund managers. Here are the highlights.
Undisclosed Conflicts of Interest
Throughout 2015, the SEC focused on undisclosed conflicts of interest, noting that it would make finding such conflicts an examination priority and that it would follow through with enforcement actions when it found such conflicts. In particular, the SEC keyed in on the following … Read more
In September 2007, Northern Rock, a British bank, sought and received liquidity support from the Bank of England because of financial difficulties resulting from the global financial crisis. As a result of mounting political pressure that Northern Rock was exploiting taxpayers’ money to pay its shareholders, the bank decided to scrap a £59m interim dividend payout, which had been announced before the beginning of the crisis (Financial Times, 2007).
Recent academic literature (Acharya et al., 2011; Onali, 2014) shows that banks in financial distress pay dividends to exploit government support, and this results in a transfer of bank default risk … Read more
On January 21, 2016, the Federal Trade Commission (FTC) announced the latest annual revision to the size thresholds governing premerger notification requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Section 7A of the Clayton Act, 15 U.S.C. § 18a (the “HSR Act”). The HSR Act requires parties to transactions meeting certain size and other tests to file premerger notification forms with both the FTC and the Department of Justice Antitrust Division and observe a mandatory waiting period prior to closing. The new thresholds will apply to transactions consummated on or after the effective date, which is 30 … Read more
Once again, NML v. Argentina is in the spotlight. Sovereign debt’s “trial of the century” has been the focal point of intense academic and policy debates, prompted a Supreme Court decision, and even triggered a contested default by Argentina in 2014. But the spotlight now points in a different direction. With a newly elected government, Argentina’s decade-long standoff with holdout creditors is set for negotiations—and potentially—a final settlement. In our article, we analyze key economic and legal factors underlying the NML litigation, with a particular emphasis on issues relevant to a potential settlement.
Argentina’s Holdout Litigation
Argentina’s … Read more
In a recent decision relating to the sale of a portfolio company by one private equity firm to another—Prairie Capital v. Double E (Nov. 24, 2015)—the court provided important guidance with respect to a buyer’s ability to make post-closing fraud claims against a portfolio company’s executives and its private equity fund sellers.
Significance of the decision
- Reminder that representations and warranties in the sale agreement affect not only indemnity claims but fraud claims. The decision serves as a reminder that, in a sale agreement that includes a typical non-reliance provision (i.e., a statement that the buyer has not relied
… Read more
The message of the Dow/DuPont merger and split up is simple: No firm is today “too big to target.” Activists can see the transaction as evidence that, even in the rare case where they lose a proxy fight (as they did at DuPont last year in a squeaker), the handwriting is still on the wall, and their game plan, if appealing, will ultimately prevail. Even though Trian could not win a majority vote to seat its candidates on the DuPont board, it held onto its stake, and the DuPont board quickly ditched their CEO in the wake of that fight … Read more
On November 18, 2015, the Securities and Exchange Commission (“SEC”) proposed amendments (the “Proposal”) to Regulation ATS and related rules under the Securities Exchange Act of 1934 (the “Exchange Act”) to impose extensive new transparency requirements on, and greatly increase the SEC’s active oversight of the design of, alternative trading systems (“ATSs”) that facilitate transactions in National Market System stocks (generally, exchange-listed equities) (“NMS Stock ATSs”).
The extensive level of disclosure that would be required under the Proposal and the SEC’s ongoing involvement in approving or reviewing the design and … Read more
Institutional Shareholder Services Inc. (ISS) recently issued, in the form of Frequently Asked Questions, a further update to its 2016 proxy voting guidelines to outline the types of management-sponsored proxy access provisions that ISS will deem responsive to shareholder-supported proxy access proposals, and those that ISS will deem too restrictive of shareholders’ ability to nominate director candidates or propose other items of business at annual shareholder meetings through the company’s proxy statement. With more than 90 shareholder proposals made at annual meetings in 2015 (more than 50 of which received majority support), proxy access has gained considerable momentum and … Read more
Because of the separation of ownership and control of public companies, the quarterly earnings that firms report are immensely important to outside investors. They are the most relevant barometer of not only a company’s recent past performance, but also of its prospects for success in the future. The importance of “high quality” earnings – those that most accurately reflect the economic fundamentals of a company – has been demonstrated by researchers showing that they increase capital allocation efficiency (Biddle and Hilary 2006; Biddle et al. 2009), lead to a lower cost of capital for the firm (Aboody et al. 2005; … Read more
In 2015, in a trilogy of releases on early-stage capital-raising, the U.S. Securities and Exchange Commission (the “SEC“) took bold steps to clarify its integration guidance. The result changes the textbook on how various securities-based offering methods can be combined. Principally, a long-required five-factor test that often blunted the concurrent use of different offering methods has now been replaced in many contexts with a unitary framework focused on whether advertising and solicitation in one offering is improperly conditioning the market for another. In addition, updated integration safe harbors permit (or propose to permit) the serial use … Read more
Given concerns over “a ‘Houdini’ disappearance of market makers in general” and demands “to increase obligated liquidity in our markets,” one may ponder on the state of the market for liquidity. The market making crisis covering different strata of securities—for instance, high-volume stocks traded on leading exchanges and elsewhere via sophisticated algorithms, smaller-cap stocks representing emerging companies, or corporate bonds traded over the phone and on new electronic platforms alike—also highlights a much broader market structure crisis in the securities industry. The observed multitude of trends and phenomena, such as a further redistribution of liquidity from have-nots … Read more
The quasi collapse of the global financial system during the crisis of 2007-2009 has triggered an extensive debate about the role of large complex banks. On the one hand, banks are seen as “too complex to fail”, and researchers and policy makers argue that the main danger is that financial institutions and markets are becoming “too big to understand” or “too complex to depict”, and therefore need to shrink and be simplified. On the other hand, bankers argue that caps on bank size are inefficient because both size and complexity help banks diversify risks and innovate to create additional profit … Read more
On December 18, 2015, President Obama signed into law the Cybersecurity Act of 2015. The Act, arguably the most significant piece of federal cyber-related legislation enacted to date, establishes a mechanism for cybersecurity information sharing among private‑sector and federal government entities. It also provides safe harbors from liability for private entities that share cybersecurity information in accordance with certain procedures, and it authorizes various entities, including outside the federal government, to monitor certain information systems and operate defensive measures for cybersecurity purposes. The Act also contains provisions designed to bolster cybersecurity protections at federal agencies, assess the federal government’s cybersecurity … Read more
On November 3rd, high-frequency trader Michael Coscia was found guilty in Chicago in one of the most-watched financial trials in recent years. His conviction under Dodd-Frank’s new anti-spoofing provision is important on a number of levels: what it means for a number of other market manipulation investigations, its deterrence value going forward, and the failure of the void for vagueness challenge mounted by the defense. Coscia gives the imprimatur of the Federal courts to Dodd-Frank Section 747 as a tool to police the markets in the new financial world where “trades are not the basic unit of market information—the … Read more
The limited liability company (LLC) is not only a widespread business form for non-listed firms but also is used by listed companies. There were twenty publicly traded US LLCs in September 2013—all formed in Delaware. Two more Delaware LLCs have joined their ranks since then (the number of IPOs by limited partnerships, another “uncorporate” business form, is greater—26 Delaware LPs went public during the last two years). Since Delaware rules on LLCs, with very few exceptions, are cast as defaults, the LLC operating agreement is the primary source of governance. This is in stark contrast to listed corporations that have … Read more
Corporate governance mitigates agency costs by protecting outside investors from exploitation from insiders, as well as aligning the financial and other incentives of insiders with those of the principal. The literature remains underdeveloped, however, on those tasked with shaping and enforcing internal corporate governance. These executives, known as gatekeepers, serve as reputational intermediaries who verify and certify information to the market. The most prominent gatekeeper in the firm is the Chief Legal Officer (CLO). The CLO is responsible for monitoring for firm misconduct, supervising internal and external legal resources, and advising the CEO and the board of directors on matters … Read more
The Basel Committee on Banking Supervision (BCBS) on December 10th issued the second iteration of its proposed revisions to the standardized approach (SA) for credit risk measurement. Following up on last year’s initial issuance, the proposed revisions are intended to amend BCBS’s currently applicable SA in order to achieve a better balance between risk sensitivity, simplicity, and comparability.
While the latest proposal includes significant changes from last year’s version in response to BCBS’s quantitative impact study (QIS) and industry comments, several important issues remain. Most importantly, the revised proposal does not include an implementation timeline, and kicks the can … Read more
Debt has undergone a remarkable resurrection in relation to banks’ capital structures. In the immediate aftermath of the crisis it was uncertain whether debt would survive at all in the Basel Committee’s minimum capital requirements for internationally active banks. Today, however, debt is heavily promoted by bank regulators as an essential ingredient in the resolution arrangements for global systemically important banks (GSIFIs). In my article, The Fall and Rise of Debt in Bank Capital Structures, I chart how this remarkable change came about.
In the aftermath of the financial crisis of 2007-9 much criticism was directed at the low … Read more
Ethan Allen and its management prevailed a few weeks ago against an intense hedge fund activist campaign to remove its entire board of directors.
An analyst of one of our larger shareholders, the Gabelli funds, observed “I’ve never seen a company mount a better campaign against an activist investor than Ethan Allen did… Farooq Kathwari did a good job of implementing their strategy and tactics, to the point where people might study this as an example of how management can push back against an activist investor.” To explain, the Ethan Allen management and board directly engaged and listened to our … Read more
In two previous posts, I described the financial industry’s “single point of entry” (SPOE) strategy for resolving failed megabanks. The SPOE approach – which has been endorsed by the Federal Reserve Board (Fed) and other regulators – could be implemented under the Orderly Liquidation Authority (OLA) established by Title II of the Dodd-Frank Act or under a proposed new “Chapter 14” of the Bankruptcy Code. As I explained in my previous posts and a forthcoming law review article, an SPOE resolution would involve only the parent holding company of a failed megabank and would impose losses only on … Read more
High frequency trading is all of a go,
With joy to the traders and profits that grow,
It brings to investors an unhappy blow.
Investors and traders in capital markets have always sought to be better informed and to trade more quickly than their competitors. Thus new information technologies have been quickly adopted. As technology has evolved there has been a transition from carrier pigeons and semaphores, through telegraph, ticker tape and telephones, to fast computers and optic fibre links. The resulting evolution in capital markets has been towards faster and faster trading. High frequency trading, where milliseconds matter, is … Read more
The conventional story around the Gramm-Leach-Bliley Act is that it was the final blow in bringing down the Glass-Steagall Act wall that separated commercial and investment banking in 1999, increasing risky business activities by commercial banks and inadvertently precipitating the 2007 financial crisis. But the conventional story is only one-half complete. What it omits is the effect of change in commercial bank regulation on investment banks. After all, it was the failure of Lehman Brothers—an investment bank, not a commercial bank—that sparked the meltdown.
My recent article, Size Matters: Commercial Banks and the Capital Markets, fills in the rest … Read more
Headlines about unicorns—private companies with valuations of a billion dollars or more—have dominated newspapers such as The New York Times, The Wall Street Journal, and the like. It has become part of the fabric of the venture capital landscape and many startups strive to achieve unicorn status. In fact, unicorns are no longer rare and almost mythical, but are now ubiquitous. In 2013 when the term unicorn was first used by Aileen Lee of Cowboy Ventures and later popularized by others in the venture capital community and media, there were 39 unicorns. At last count, there were a … Read more
As political spending surges toward record levels in 2016, post-Citizens United changes in the funding of American political campaigns will require directors to oversee a dramatically deregulated political environment. Corporate money will play a large role in the election, heightening risks for companies and shareholders. As a result, directors face a new responsibility to help their companies navigate what is increasingly treacherous terrain.
Just as outsourcing a firm’s supply chain without adequate monitoring can expose a company and its directors and shareholders to unwanted attention — think Apple Inc. and Foxconn – the outsourcing of political spending through trade associations … Read more
On December 1, 2015, the New York Department of Financial Services (the DFS) released a proposed rule that would require certain New York-regulated financial institutions (Regulated Institutions) to comply with enhanced anti-terrorism and anti-money laundering (AML) requirements and subject chief compliance officers to potential criminal liability for noncompliance (the Proposal).
The proposed regulations aim to strengthen New York financial institutions’ fight against terrorist financing and money laundering at a time when terrorism concerns are at their highest in years. The Proposal, which was developed by the DFS over several months, also comes amid persistent calls from the general public to … Read more
Intermediation is a fundamental fact of finance. Investment banks underwrite stock offerings for companies. Commercial banks safeguard the savings of workers. Fund managers invest the pensions of retirees. Exchanges match orders of buyers and sellers. Brokers facilitate trades of investors. Credit card companies advance funds to consumers. Collectively, these and other intermediaries form the fabric of modern finance. Yet in the face of all these financial links, entrepreneurs and and technologists continue to endeavor toward the possibilities of fundamentally disrupting and disintermediating these existential financial ties with innovations like ApplePay, Square, and Venmo.
Despite numerous extraordinary innovations in finance, true … Read more
Merger agreements and other complex contracts often contain “anti-reliance” provisions reciting that the representations in the agreement are the sole representations on which the parties relied in entering into the contract. The law regarding the interpretation and enforceability of such clauses—whether in a merger agreement, a settlement agreement, or other commercial contract—varies by jurisdiction, and continues to develop. On November 24, 2015, the Delaware Court of Chancery in Prairie Capital III, L.P. v. Double E Holding Corp. held that, as a matter of Delaware law, there are no “magic words” to disclaim reliance on extrinsic representations. While a standard … Read more
Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404 hereafter) and the associated implementation guidance require firms’ management and independent financial statement auditor to formally document, test, and report publicly in the annual Form 10-K on the effectiveness of internal controls over financial reporting. The costs of complying with this requirement are substantial and include a significant fixed component, making them particularly burdensome for small firms (e.g., Engel et al. 2007; Kamar et al. 2007; SEC 2009; Alexander et al. 2013). As a result, the Securities and Exchange Commission (SEC) delayed the implementation of SOX 404 several times for … Read more
Large and small technology-creating businesses rely on trade secret law to protect strategic information. Lawyers recommend a variety of legal tools to protect trade secrets, including tools that allow firms to share secrets as safely as possible. One of those tools is an employee covenant-not-to-compete (“non-compete”). Non-competes are controversial because they restrain an employee’s freedom to earn a living and restrict so-called “knowledge spillovers” between technology businesses that affect the pace and magnitude of innovation. A few states ban the enforcement of non-competes but most enforce them to the extent they are reasonable. As such, “reasonableness” provides the … Read more
There are few types of debt as internationally issued and traded as the debt securities issued in securitisation (in the United States, spelled securitization) transactions. European investors commonly invest in securities issued in U.S. securitisation transactions, and vice versa.
It is generally agreed that securitisation’s abuses contributed to the global financial crisis. Repayment of securities issued in certain highly leveraged securitisation transactions was so sensitive to cash-flow variations that, when the cash-flow assumptions turned out to be wrong, many of these highly rated securities defaulted or were downgraded. That, in turn, sparked a loss of confidence in the value of … Read more