On March 10, 2015, the Consumer Financial Protection Bureau (CFPB) released a much anticipated report regarding the use of pre-dispute arbitration clauses (sometimes referred to as “mandatory” arbitration clauses). The use of these clauses is fairly common in the consumer financial services sector. The CFPB was tasked in Section 1028(a) of the Dodd-Frank Act with studying these clauses, making a report to Congress about their use, and – if the CFPB finds it to be in the public interest and protective of consumers – promulgating rules to prohibit or regulate their use.
The CFPB’s 728-page report contains extensive data on … Read more
In an environment of escalating antitrust activity around the globe with ever increasing government sanctions and private litigation exposure, it pays to ensure that your antitrust compliance efforts evolve with changes in your business and the enforcement landscape and are road-tested through regular audits. In this briefing, we highlight some key areas of antitrust enforcement to be prepared for in 2015.
Aggressive Prosecution of Cartels Will Continue
With the proliferation of leniency programs and “amnesty plus” incentivizing companies to self-report cartel conduct, 2015 is likely to bring new cartel investigations and expansion of existing cases into related product markets. The … Read more
Regulating weather risk is an increasingly urgent social issue. There is little doubt that the frequency and magnitude of weather-related disasters are rising over time. Although the precise combination of causes may be debated—emissions of greenhouse gases? natural climatic cycles? increased concentration of populations in coastal areas? —the trend is undisputed. As the magnitude and frequency of weather patterns seem to pose a risk higher than ever, a large and growing fraction of humanity’s physical assets is located in harm’s way. Thus, the combination of severe natural forces and increased human exposure pose one of the major public policy challenges … Read more
By now, much of the dust has settled around the Supreme Court’s decision in Yates v. United States. Yates was the odd case of a commercial fisherman convicted of violating 18 U.S.C. § 1519, the “anti-shredding” provision of the Sarbanes-Oxley Act. A federal jury found that John Yates destroyed “tangible objects” as proscribed by the statute when he threw a crate of undersized fish off his boat and into the Gulf of Mexico after a fish and game officer instructed him to keep them on ice until the boat returned to port. Although the judge sentencing Yates commented … Read more
The U.S. Supreme Court ruled today that a statement of opinion in a registration statement cannot be actionable as a misstatement of fact under § 11 of the Securities Act of 1933 if the issuer actually believed the opinion expressed. However, the statement of opinion can be actionable on an omissions theory if the registration statement omits material facts about the issuer’s inquiry into, or knowledge about, the statement of opinion and if those omitted facts conflict with what a reasonable investor would have expected from a contextual reading of the statement of opinion.
The Supreme Court’s decision in Omnicare, … Read more
We recently published a study (“2015 Investor Survey: Deconstructing Proxy Statements”) in collaboration with RR Donnelley and Equilar that examines how institutional investors use the information in corporate proxies to make voting and investment decisions. Full results are available here.
We find that institutional investors are highly dissatisfied with the quality of information that they receive about corporate governance policies and practices in the annual proxy. Across the board, investors want proxies to be shorter, more concise, more candid, and less legal. Fifty-five percent of investors believe that the typical proxy statement is too long. Forty-eight percent believe … Read more
On February 11, 2015, the Securities and Exchange Commission issued a final rule (the “Final Rule”) and proposed amendments (the “Proposed Rule”) on the reporting and public dissemination of security-based swap (“SBS”) information, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Notably, the SEC:
- delayed establishing a final compliance schedule for SBS reporting;
- left many details of SBS reporting, including many of the required data elements, the format of reports and the assignment of product identifiers for standardized SBS, to registered security-based swap data repositories (“SBSDRs”);
- created an interim phase for the reporting of SBS information,
… Read more
With Chair Mary Jo White in her second year at the helm, the Securities and Exchange Commission showcased its efforts, improvements, and enforcement successes at this year’s SEC Speaks Conference. The Commission highlighted that it brought a record number of cases—755 enforcement actions—in fiscal year 2014, and obtained $4.1 billion in monetary relief. The Commission continues to emphasize its increased use of data analytics in both its regulatory efforts and enforcement investigations. As usual, the Commission, and the Division of Enforcement in particular, used the Conference to present their case that the SEC is firing on all cylinders.
Insider Trading … Read more
In this paper, we study peer firm behavior to ascertain (i) whether exposure to financial misrepresentation fuels similar behavior or deters it among peer firms; and (ii) what factors increase or decrease the likelihood of contagion? The prior years have witnessed a remarkable increase in news about corporate misconduct including fraudulent financial reporting at companies such as Enron, WorldCom, and Tyco, the collapse of Arthur Andersen on allegations of lax or corrupt audit work, tax shelters structured by KPMG to assist clients in minimizing tax obligations, and the revelation of the $50 billion Ponzi scheme run by Bernie Madoff. Given … Read more
The Committee on Foreign Investment in the United States (“CFIUS”), a multi-agency U.S. regulatory body empowered to review transactions involving a foreign person and a U.S. business that may affect U.S. national security, recently delivered its unclassified Annual Report to Congress for the calendar year 2013 (“Annual Report”). In accordance with the legal prohibition against public disclosure of such information, the Annual Report contains no information with respect to specific transactions. Nonetheless, it remains a remarkable window into the reach and operation of CFIUS, and its impact on transactions involving U.S. businesses.
As in previous years, and as required … Read more
The Delaware Corporation Law Council—composed of members of the Delaware bar charged with proposing annual amendments to the Delaware General Corporation Law (DGCL)—has proposed several potentially significant amendments to the DGCL. Among other things, the amendments would seek to prohibit “fee-shifting” provisions in charters or bylaws. They would authorize forum selection provisions in charters and bylaws if such provisions allow claims to be brought in Delaware courts but prohibit them if they do not. The proposed amendments also would alter various aspects of the appraisal rights available to stockholders upon a merger. The proposed amendments still need to be … Read more
Courts and commenters regularly describe corporate charters and bylaws as “contracts” among shareholders. This necessarily raises the question whether the Federal Arbitration Act (FAA) – which requires that arbitration clauses in “contracts” be enforced according to their terms – applies to such documents in the same way it applies to ordinary contracts. In a series of decisions involving a single Maryland-based REIT, two courts separately held that corporate bylaws are akin to ordinary contracts and equally subject to FAA analysis. However, in my forthcoming article, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, … Read more
Since the Corporation Law Council of the Delaware State Bar Association announced earlier this month that it was recommending statutory amendments to prohibit “loser pays” fee shifting bylaws and charter provisions (and thus overrule the Delaware Supreme Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund), a predictable reaction has followed. Plaintiff’s attorneys and most academics applauded the decision, fearing that the alternative would be the death knell of private enforcement. In contrast, conservatives have attacked the proposed legislation, seeing it as the end of Delaware’s position as the champion of “enabling” corporate legislation and predicting that … Read more
Thank you, Bill, for that very kind introduction. I am honored to be here.I see that you have an ambitious agenda over the next two days discussing some of the hardest legal challenges companies are facing today. We at the SEC also have a very ambitious agenda of priorities of interest to you, including completing mandated Dodd-Frank and JOBS Act rulemakings, continuing to optimize our equity and fixed income markets, enhancing our monitoring and oversight of the asset management industry, making further progress on our disclosure effectiveness review, continuing to strengthen our critical exam program, which addresses the areas posing
… Read more
On February 10, 2015, the Securities and Exchange Commission (“SEC”) filed settled administrative cease-and-desist proceedings against two former chief financial officers (“CFOs”) of Saba Software, Inc. for their failure to reimburse the company for the stock-sale profits and bonuses they received in the 12 months following the filing of periodic reports necessitating restatement, as required under Section 304(a) of the Sarbanes-Oxley Act. The two respondents consented to the entry of the cease-and-desist order without admitting or denying the findings therein.
The clawback action stems from the falsification of Saba’s time records over a period of more than four years, … Read more
The Council of the EU has reached political agreement on the EU Benchmark Regulation (the Regulation). The legislation will impose controls on a range of financial market activity that uses interest rate, currency, commodity and other indices to set prices and contract values. Although not yet finalised the new rules are expected to be published later this year and apply in 2016. The Regulation is expansive in scope, covering not only indices such as LIBOR and the DAX but also many other less obvious ‘benchmarks’. The new rules could lead to the transformation or even disappearance of some benchmarks, presenting … Read more
With less than six months to conform to the Volcker Rule’s proprietary trading restrictions, large banks are working quickly to build out their compliance programs. Last summer, they scrambled to build systems to report monthly seven metrics by September 2, 2014, as required by the rule. Now banks’ focus has moved to proving their trading desks’ exemptions from the proprietary trading restriction as part of their compliance programs that must be in place by July 21, 2015.
Among these exemptions, market making is becoming the most predominantly used. However, the desks taking this exemption (“market making desks”) face … Read more
Last year’s best-seller by Michael Lewis, Flash Boys, ignited a firestorm of debate on the subject of high-frequency trading, or HFT. Lewis’s central claim is that the stock markets are “rigged,” with HFT shops skimming sizable amounts off of trades by other, slower traders. The exchanges are allegedly in on the game, as they enable HFT through co-location, private data feeds, and the development of complex special order types, all in return for sizeable fees. Although SEC Chair Mary Jo White quickly rejected Lewis’s claim, public debate continued and a number of lawsuits were filed against the exchanges and … Read more
Earlier this week, China’s antitrust regulators started off 2015 with a continuation of last year’s aggressive enforcement of the Anti-Monopoly Law (“AML”) by levying an almost $1 billion fine against Qualcomm, about 8 percent of the company’s 2013 China revenue — equaling the highest percentage penalty previously dispensed under the AML, but short of the 10 percent maximum allowable. The penalty ends the NDRC’s first “abuse of dominance” investigation.1 The fine is greater than the total amount of 2014 NDRC AML fines and is five times the combined $202 million fines against the 12 Japanese auto parts and bearings … Read more
Delaware corporations and their advisers have been eagerly awaiting the response of the Delaware legislature to the recent surge in appraisal arbitrage and judicial pronouncements allowing this activity and suggesting that lawmakers should step in if they perceive a problem. It now appears based on a proposal released by the Delaware Corporation Law Council that the legislature may act as soon as this week. If the lawmakers follow the recommendations of the Council (which they usually do) the changes will likely disappoint Delaware corporations, make mergers and acquisitions in that important state more difficult, reduce deal flow, and lead to … Read more
According to a February 25, 2015 Wall Street Journal report, in recent weeks the SEC has sent requests to a number of companies seeking years of nondisclosure agreements, employment contracts and other documents as part of an agency probe into the potential silencing of corporate whistleblowers. The reported probe comes as SEC officials have expressed concerns about “pre-taliation”—the alleged use of express provisions in employment agreements, codes of conduct and severance agreements designed to deter employees from voluntarily communicating with the SEC. Chief of the SEC’s Whistleblower Office, Sean McKessy, has repeatedly warned that the agency’s Enforcement Division is … Read more
“I am raising the question here and internally at the SEC as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us. […] In some cases, lengthy and complex disclosure may indeed be a direct result of the Commission’s rules.”
– SEC Chair Mary Jo White
Regulators have long voiced concerns over the effectiveness of overly complex and lengthy financial statements in communicating information to investors. Detailed and lengthy disclosures can increase information processing … Read more
Should you be able to take the risk of paying for a meal in an unregulated, non-traditional restaurant—billed as a “secret supper”—in a person’s home? Or should the government step in to regulate as it would any other dining establishment: inspect the kitchen, require a business license, control what food can be served and how it can be prepared, and ensure compliance with local zoning ordinances pertaining to home businesses and building codes addressing fire exits? I confront these issues in my forthcoming essay, Regulating the Underground: Secret Supper Clubs, Pop-Up Restaurants, and the Role of Law, which is … Read more
Thank you for the opportunity to speak to you today, it is great to be back in New York. The Citizens Budget Commission has played an important role over the years as a forum to discuss issues of interest to New Yorkers that are often also of national and even global importance. Given New York’s preeminence as a center of global finance, I thought it would be appropriate to discuss just such a topic, which is how the Federal Reserve oversees the largest financial institutions, many of which are headquartered or have a major presence here, and how that oversight … Read more
Managers are concerned about how their current performance would influence their current employer’s and the labor market’s assessment of their ability. An unfavorable assessment of their ability can have significant adverse effects, including termination and poor job prospects thereafter. Thus, career concerns are likely to motivate managers to work hard and generate good performance. We further argue that career concerns may also motivate CEOs to withhold bad corporate news and gamble that subsequent corporate events will turn in their favor, enabling them to bury the bad news. To test our prediction, we consider two situations when CEOs’ career concerns are … Read more
Discussions about regulating investment advice have largely focused on whether to harmonize the laws governing two categories of individuals within the securities world—registered investment advisers and stockbrokers. The discussion has overlooked insurance brokers who often times also provide investment advice. Our article broadens the focus by arguing that harmonizing the regulation of investment advice necessarily requires reforms reaching beyond securities regulation and into insurance regulation as well. We argue that consistent standards should govern the investment advice provided to retail investors. Given the current regulatory fragmentation, this may only be accomplished by adopting a federal Investment Advice Act.
Today’s fragmented … Read more
If a party obtains information about a public firm before its initial public offering (IPO), and the party themselves is not an insider of the firm, should they be allowed to profit from the information after the IPO? We investigate this question in our research paper, “Outside Insiders: Do Limited Partners Obtain Valuable Information about Stocks Backed by their Venture Capital Funds?” As the title implies, we find that this situation can occur when the IPO is backed by a Venture Capitalist (VC).
Venture Capital backed IPOs account for more than half of all IPOs. In the years … Read more
Many public companies continue to consider their options in responding to proxy access shareholder proposals following the Division of Corporate Finance’s unusual announcement that it will not opine on “the application of Rule 14a-8(i)(9) during the current proxy season.” But over the last few days, several companies have made notable decisions. Whole Foods Market, Inc., which had led the charge earlier this proxy season by obtaining no-action relief from the Securities and Exchange Commission (“SEC”) on the ground that it was planning to submit a conflicting management proposal to shareholders, announced on February 13 that it has decided to … Read more
On February 9, 2015, the U.S. Securities and Exchange Commission (SEC) issued a proposed rule related to the disclosure of hedging policies applicable to board members, officers, and other employees. The proposed rule would implement one of the remaining requirements adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The proposed rule would amend Item 407 of Regulation S-K to require companies to disclose whether they permit directors, officers, and other employees to hedge the company’s securities, including any equity securities of the company’s parent, subsidiaries, or any subsidiary of any parent of … Read more
The SEC staff issued a no-action letter recently that will allow some companies to refinance their debt using tender and exchange offers shorter than the 20 business days required in the tender offer rules. The letter extends to high yield debt tender offers and to exchange offers pre‑existing guidance that allowed shorter tender offers for investment grade debt. The letter also imposes a number of new limitations on and requirements for shorter tender offers.
The no‑action letter—Abbreviated Tender or Exchange Offers for Non‑Convertible Debt Securities, January 23, 2015—supersedes prior no‑action letters for tender offers launched after its date.… Read more
A nuance in margin rules proposed by the CFTC and other federal financial regulators threatens to undermine a carefully struck balance in Dodd-Frank. As background, Title VII of Dodd-Frank subjected U.S. derivatives markets to a host of new regulations. Broadly speaking, regulations promulgated by the CFTC under Title VII require that certain types of swaps be centrally cleared through a clearinghouse and a subset of those swaps be executed on a swap execution facility (SEF) or designated contract market (DCM). The clearing mandate helps mitigate credit risk in the derivatives market through interposing the credit … Read more
Recent Delaware decisions have reinforced the expansive power and authority of a board to adopt and enforce corporate bylaws. Advance notice bylaws have become commonplace; exclusive forum bylaws are becoming more prevalent; and adoption of fee shifting bylaws generally awaits action by the Delaware legislature, which is expected in the upcoming 2015 session.
Exclusive Forum Bylaws
An exclusive forum bylaw typically requires that intra-corporate litigation (such as stockholder suits) be brought only in the courts of a specified state (generally where the corporation is incorporated, and sometimes where it is headquartered). The purpose is to increase the predictability and efficiency … Read more
The following post is taken from an address by CFTC Commissioner J. Christopher Giancarlo before the ABA Business Law Section, Derivatives & Futures Law Committee Winter Meeting and is dated January 23, 2015. Commissioner Giancarlo’s address may be accessed here.
Thank you for the kind introduction.
Let me begin with the disclaimer that my remarks today reflect my own views and do not necessarily reflect the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow Commissioners or the CFTC staff.
It is an honor to speak to you today. I see so many truly distinguished members … Read more
Earlier this month, federal district Judge Richard J. Leon rejected outright a deferred prosecution agreement with a company, “looking at the DPA in its totality,” and noting that not only were “no individuals . . . being prosecuted for their conduct at issue here” but also “a number of the employees who were directly involved in the transactions are being allowed to remain with the company.” No federal judge has done such a thing before. But Judge Leon’s ruling may only be the beginning, if the practice of charging companies and not individuals continues without real reforms.
A corporate criminal … Read more
Today we feature three posts on the theme of Fannie Mae and Freddie Mac. The first two posts — from David Min and Brad Miller, respectively — question assumptions about the proper role of government and markets in home mortgage securitization markets, arguing for restraint in privatization. The third post, from Mark A. Calabria, looks to the conservatorships of Fannie Mae and Freddie Mac to draw lessons as to whether tools for resolution introduced by the Dodd-Frank Act are likely to be used in the event a major financial institution suffers distress. All of these posts are based … Read more
There was perhaps no issue of greater importance to the financial regulatory reforms of 2010 than the resolution, without taxpayer assistance, of large financial institutions. The rescue of firms such as AIG shocked the public conscience and provided the political force behind the passage of the Dodd-Frank Act. The force is reflected in the fact that Titles I and II of Dodd-Frank relate to the identification and resolution of large financial entities, and Title VIII relates to the resolution of financial market utilities. How the tools established in Titles I, II and VIII are implemented is paramount to the success … Read more
The US economy has been one of the most dynamic economies in the world but recent research suggests that US dynamism is in decline. The startup, job creation, and job destruction rates have all declined over the past three decades with a possible increase in the rate of decline in the past decade. The dynamism decline is robust, appearing in a variety of data. Moreover because startups and the movement of resources from low to high productivity firms are closely associated with improvements in productivity, the decline of dynamism may reduce real wages and the standard of living.
Could … Read more
I want to thank the Brookings Institution for inviting me to comment today on Martin Wheatley’s presentation on the Fair and Effective Markets Review (Review). The Review is an ambitious and important initiative. Although London is perhaps the leading center for many fixed-income, currency, and commodities (FICC) markets, these markets are global, and the United States and the largest U.S. firms play key roles in them. So the Review addresses issues that affect our markets as well.
The Review looks to identify further steps that should be taken to restore public confidence in FICC markets in the wake of the … Read more
Corporate accounting standards are an important basis for the measurement of firm and managerial performance and for the stewardship of corporate assets in a market economy. Understanding the process that culminates with the creation of accounting standards can provide insights into both their procedural legitimacy and how they will eventually be used. In a recent study, we examine the role of auditors in the accounting standard-setting process at the Financial Accounting Standards Board (FASB).
Auditors play a crucial role in the functioning of capital markets by serving as independent agents who attest that companies, in preparing their financial reports, … Read more
The Second Circuit Court of Appeals’ 2014 ruling in Chechele v. Sperling, which addressed an issue of first impression among the Courts of Appeals regarding the application of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to prepaid variable forward contracts (“PVFCs”), is the most recent attempt by the courts to fill in gaps in the analytical framework governing the application of Section 16 to complex derivatives. The Sperling case, which has received scant attention from commentators, is an important decision that should mitigate concern over the risk of … Read more