The 2010 Dodd-Frank Act provided shareholders of U.S. public corporations the right to vote on chief executive officers’ compensation, at least every three years. The so–called say on pay vote is advisory but was designed to curb overly generous executive pay packages.
Since 2011, the financial press, consultants and academic scholars have considered how shareholders make use of this right. According to the latest results of Semler Brossy, 93 percent of the Russell 3000 companies received say on pay support of more than 70% in 2016, and the failure rate dropped to 1.7 percent, the lowest level since … Read more
Family does matter in the United States. Census data indicate that more than 20 percent of men have worked for the same employers as their fathers, while a recent New York Times article suggests that the sons of senators have a 8,500 times higher chance of becoming senators than the average American male. A large body of empirical research in economics and finance has been devoted to the study of family firms and their role in the economy. Yet little is known about the implications of widespread family ties outside family-owned firms.
In an attempt to measure how widespread family … Read more
On July 28, 2016, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued its outline of proposals under consideration for the regulation of debt collection. This 117-page release, entitled “Small Business Review Panel for Debt Collector and Debt Buyer Rulemaking: Outline of Proposals Under Consideration and Alternatives Considered” (“Outline”), was announced in connection with the CFPB’s field hearing on debt collection in Sacramento, California (“Field Hearing”). The Outline is in preparation for the convening of a Small Business Regulatory Enforcement Fairness Act Panel (“SBREFA Panel”), a process mandated by the Dodd-Frank Act for CFPB rules anticipated to have a significant … Read more
The positive correlation between oil prices and equity markets over the past few years has been discussed extensively in the media as well as by prominent economists, such as Bernanke and Obstfeld, and has brought into question the generally accepted view that lower oil prices are good for the U.S. and the global economy. However, in a recent study, we illustrate that there has been no stable relationship between real oil prices and equity returns over the last 71 years. Nevertheless, we argue that, as in previous episodes of falling oil prices, lower oil prices improve profit opportunities … Read more
On July 6, 2016, the European Parliament officially adopted the Network and Information Security (NIS) Directive which is expected to fully enter into force in May 2018. The NIS Directive is the first set of cybersecurity rules to be implemented on the EU level, adding to an already complex array of laws which companies have to comply with when implementing security and breach response plans. The Directive aims to set a minimum level of cybersecurity standards and to streamline cooperation between EU Member States at a time of growing cybersecurity breaches.
The final text (which took the EU and … Read more
When should changes in markets for financial securities drive changes in law? In my forthcoming essay, available here, I argue that a normative framework for making that examination would increase transparency and legitimacy. It would also help counter the tendency of politics to distort legal responses to market changes. During economic prosperity, for example, the political push for deregulation can leave financial markets under-protected. But when the bubble of prosperity inevitably bursts, the political push for regulation can lead to over-protective laws.
The essay argues that the extent to which financial market changes should drive legal changes should depend on … Read more
On July 28, in conjunction with a field hearing on debt collection, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) released an outline of proposals under consideration to regulate the debt collection industry (the “Outline”). Released as part of the required consultation with a cross section of small entities likely to be affected by the regulation pursuant to the Small Business Regulatory Enforcement Fairness Act (the “SBREFA”), the Outline contains broad proposals to cover the debt collection activities of third-party collection agencies, debt buyers, collection law firms and loan servicers. The CFPB has indicated that it will convene … Read more
Today the bulk of American workers’ retirement savings, worth trillions of dollars, is in self-directed individual retirement accounts (IRAs) and defined contribution pension plans. Understandably, many workers with self-directed accounts turn to financial advisers for help in matching the vast and complicated array of investment options in today’s financial markets to the worker’s particular circumstances. However, the manner by which financial advisers are compensated has long raised concerns about conflicts of interest. Some advisers are compensated by the providers of the financial products that the adviser sells, giving the adviser a financial incentive to recommend the products that provide the … Read more
Since 2010, 30 states and the District of Columbia have passed legislation authorizing for-profit “public benefit corporations” (“PBC”), known in many states just as “benefit corporations.” Although these laws vary slightly by state, each requires the board of directors of a PBC to consider the public benefit, in addition to shareholder return on investment, in their decision-making. Although state corporate law statutes and the tax code treat PBCs as for-profit enterprises, the legal focus of this new corporate model contrasts with that of traditional corporations, which focuses solely on maximizing shareholder wealth. The PBC laws are designed to empower … Read more
Insider trading is a serious form of misconduct and can result in defendants receiving lengthy prison sentences and significant monetary sanctions. Our working paper, ‘Sanctions Imposed for Insider Trading in Australia, Canada (Ontario), Hong Kong, Singapore, New Zealand, the United Kingdom and the United States: an Empirical Study’, provides a detailed analysis of the insider trading enforcement landscape across a range of common law jurisdictions over the seven year period from January 1, 2009 to December 31, 2015. In particular, our study examines custodial sentences, banning orders and pecuniary sanctions imposed for insider trading. The study is based on … Read more
On July 29, 2016, the board of directors of the Federal Deposit Insurance Corporation (FDIC) released a proposal regarding third-party lending guidance (“Proposed Guidance”) as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices.” The Proposed Guidance elaborates on previously issued agency guidance on managing third-party risks and, if finalized, could apply to all FDIC-supervised institutions that engage in third-party lending programs.
The Proposed Guidance affirms that an institution’s board of directors and senior management are responsible for managing, identifying and controlling the risks associated with lending activities … Read more
We all remember the hectic summer and fall of 2008, when the U.S. financial system was at the brink of collapse. Since then, policymakers have enacted structural reforms to the financial system but left the market in repurchase agreements largely untouched.
A repurchase agreement, or repo, is a sale of financial assets coupled with a promise to repurchase them later. Repos have economic characteristics similar to those of secured loans and bank deposits and are one of the main sources of liquidity for the U.S. financial system. Having developed free from the watchful eyes of regulators, the repo market has … Read more
On August 10, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) announced its second major enforcement action against an employer for using contracts with employees that seek to impede employees from engaging in protected whistleblowing activity. Under rules that went into effect five years ago pursuant to Dodd-Frank, such employment contracts are prohibited.
In its settlement order, the SEC faulted BlueLinx Holdings, Inc., an Atlanta-based building supply distributor, for various severance agreements that it has used over the past five years, which could have the effect of limiting the whistleblowing activities of its former employees. In … Read more
After every crisis, academics, policymakers and other observers reflect on what went wrong and what could have been done differently. This in turn leads to some reforms to laws and regulations. In the wake of widespread, multi-country corporate governance failures in the 1990s and 2000s (Enron, Tyco and Xerox in the U.S., for example, Maxwell, BCCI and Polly Peck in the UK, Parmalat in Italy and Ahold in the Netherlands), the call was for company law reforms and better corporate governance practices. The recent global financial crisis has led to many new regulations, and the revamping of existing ones, covering … Read more
Contractarians, who believe that fiduciary relationships are a species of contract, and anti-contractarians, who believe those relationships are sui generis, have long debated what fiduciary duties are and how they should be applied. Contractarians frame the fiduciary duty as one of loyalty that prohibits a fiduciary from engaging in conflicts of interest without the beneficiary’s permission. They see fiduciary duties as gap fillers that help courts determine the parties’ responsibilities if a situation arises that was not contemplated by the parties’ original agreement. Anti-contractarians, on the other hand, view fiduciary duties as a means to protect vulnerable parties from their … Read more
A Delaware bankruptcy court has invalidated a lender’s attempt to prevent a borrower from filing bankruptcy by having the borrower amend its operating agreement to require unanimous consent among its members to file bankruptcy and then issuing one “golden share” to the lender.
In In re Intervention Energy Holdings, LLC, the borrower had defaulted under a senior secured loan and subsequently entered into a forbearance agreement with its lender. As part of the forbearance agreement, the lender required the borrower to agree to (a) amend its operating agreement to require approval of each holder of common units prior … Read more
A host of studies have examined the link between accounting and the 2007-2008 global financial crisis, most of them focusing on whether fair value accounting or accounting discretion at financial institutions helped skew valuations on bank balance sheets. In our recent article, “The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis,” available here, we examine how financial reporting at non-financial firms affected the economy during the crisis. Prior studies provide evidence that the financial crisis was a relatively exogenous shock to the supply of external finance (at least with respect to any individual firm) that significantly … Read more
Companies confer the title of “Vice President” on a wide range of employees, from senior executives, in some cases, to line-level personnel, in others. While distinguishing someone functioning as a senior executive from someone in a lower-level position may be clear to a company insider, courts face a more complicated task when they are asked to draw the line, a common occurrence when employers and employees disagree over who must pay for legal fees arising out of an employee’s alleged misconduct. Company bylaws normally provide for the company to indemnify legal fees incurred by individual “officers and directors,” meaning that … Read more
“Culture, more than rule books, determines how an organization behaves.” – Warren Buffet
In recent years, there have been ongoing occurrences of serious professional misbehavior, ethical lapses and compliance failures at financial institutions. It was the crisis that exposed systematic mentality errors in finance.
The hope was that post-crisis regulatory reforms would tackle the typical mindset of short-term oriented self-enrichment in finance, considered as one of the origins of the financial crisis. Now, almost ten years after the crash in 2007, the lack of fundamental change raises the question whether there is an endemic issue within the financial … Read more
On July 13, the Securities and Exchange Commission (SEC) adopted a final rule related to the reporting and public dissemination of security-based swap (SBS) transaction information. The rule builds on an earlier reporting rule for security-based swap dealers (SBSDs) finalized in 2015.
- Cleared trade reporting aligns with the CFTC’s recent amendment to its reporting framework. Last week’s final SEC rule clarifies that registered clearing agencies are required to report any SBS to which they are a direct counterparty. This clarification makes the SEC rule consistent with a recent amendment adopted by the Commodity Futures Trading Commission (CFTC) to its
… Read more
Six months have passed since the implementation of the nuclear agreement with Iran, officially known as the Joint Comprehensive Plan of Action (the Nuclear Agreement), and the related easing of certain trade and economic sanctions on Iran. As discussed below, some changes to US sanctions have yet to be fully implemented; US and non-US firms continue to face significant compliance challenges and enforcement risks; and international banks and financial institutions remain reluctant to finance business with Iran in the face of lingering legal, reputational and business risks.
1. Changes to US and EU Sanctions Upon Implementation of the Nuclear … Read more
2015 and 2016 mark the 30th anniversaries of the Delaware Supreme Court’s landmark decisions in Unocal Corp. v. Mesa Petroleum Co. and Revlon, Inc. v. Macandrews & Forbes Holdings, Inc. Those cases and their progeny called for enhanced scrutiny standards to be applied to negotiated change of control transactions as well as to deal protection devices. During the past three decades, however, it has not been smooth sailing in the courts’ application of these standards. In fact, I have previously argued that the Delaware courts have shifted away from both the Unocal and Revlon enhanced scrutiny standards.… Read more
In March 2016, the Nasdaq Stock Market LLC (“Nasdaq”) proposed new rules regarding disclosure of third-party compensation of directors. This third-party compensation, which may not be publicly disclosed, arises when a party other than the issuer, such as an activist investor, compensates a person in connection with that person’s candidacy for director or service as a director.
With the goal of enhancing transparency around such third-party compensation of directors, Nasdaq proposed Rule 5250(b)(3), which would require Nasdaq-listed companies to publicly disclose compensation or other payments by third parties to nominees for director or board members. On July 1, 2016, the … Read more
In 2010, after considering 400 possible targets, Indiana-based funeral casket manufacturer Hillenbrand Inc. announced a plan to acquire K-Tron International Inc., a Pitman, New Jersey firm which makes industrial coal crushers and feeding equipment (including a machine to shoot raisins into breakfast cereal). Despite the considerable difference in product lines, K-Tron provided Hillenbrand CEO Kenneth Camp with a unique benefit. Camp was raised in Pitman and his mother Edith still lived nearby in his childhood home. Although Camp said the location in Pitman had no influence on his decision to buy the company, he acknowledged: “When I heard it … Read more
The Securities and Exchange Commission (SEC or Commission) brought over 400 enforcement actions in the first half of fiscal year (FY) 2016, and is on pace to surpass its record of 807 enforcement actions in a single fiscal year, set in FY 2015.
The SEC brought the vast majority of these enforcement actions as administrative proceedings (APs). On May 16, 2016, the NYU Pollack Center for Law & Business (NYU) and Cornerstone Research (Cornerstone) issued a report (Cornerstone Report) that found that in the first half of FY 2016, the SEC brought 88% of actions … Read more
Should governments be relying on corporate and securities law to promote humanitarian goals? This is the question that naturally arises when viewing the SEC’s Conflict Minerals Payment Rule, which requires corporations to disclose their conflict mineral usage as a means of curtailing the violence in the Congo. Yet the US is not alone in its reliance on disclosure mechanisms in corporate or securities laws to promote non-economic goals. The Danish government uses disclosure to promote gender parity on boards of directors; France relies on it to curb greenhouse gas emissions, and India uses it as a method for curtailing energy … Read more
On July 13, the Securities and Exchange Commission issued a proposal aimed at eliminating or updating duplicative, overlapping and obsolete disclosure requirements. The proposal is welcome, but largely technical in nature and generally focused on duplicative requirements. As a result, if adopted, it will likely have only a small impact on the total amount of information companies are required to disclose. Needed reforms that would eliminate truly obsolete disclosure requirements will likely wait for the outcome of action on the SEC’s pending Regulation S-K concept release (our client memorandum and summary are available here and here).
The proposal is … Read more
Merger activity seems to rise in step with the market. Academic papers suggest this may be due to bidders exploiting overvalued shares, a pro-cyclicality of merger economies of scale or available capital for deals, or simply the behavioral pressures of a “me too” mindset among CEOs. But this positive association is not altogether intuitive, as practitioners and academics alike ask “why do we not see merger waves during bear markets in which acquirers are bargain-hunting for undervalued firms.”
In our working paper “Merger Activity, Stock Prices, and Measuring Gains from M&A” we offer a fresh take on the positive … Read more
The Securities and Exchange Commission (SEC) is now accepting Form C filings from private companies seeking to sell securities through registered crowdfunding portals. We have been following the nascent crowdfunding space closely and will continue to monitor the adoption of crowdfunding as a new method of financing private companies.
In this alert, we will analyze offerings conducted through crowdfunding portals, offer tips for those thinking of entering the space and provide a summary of the SEC’s final rules and forms for equity crowdfunding (“Regulation Crowdfunding”).
Analysis of the First 50 Offerings
In general. As of June 30, 2016, 50 companies … Read more
A new type of warfare is upon us. In this new mode of war, finance is the most powerful weapon, bullets are not fired, financial institutions are the targets, and almost everyone is at risk. Instead of smart bombs, improvised explosives, and unmanned drones –– economic sanctions, financial restrictions, and cyber programs are the weapons of choice. This is the new reality of modern financial warfare.
The armaments of modern financial warfare are as vast, diverse, and important as the myriad of ways to raise and move money. Broadly, the financial weapons of war can be divided into analog weapons … Read more
In the wake of its release on May 17, 2016 of updated Compliance and Disclosure Interpretations (“CDIs”) relating to the disclosure of non-GAAP financial measures, the SEC’s Division of Corporation Finance has indicated in no uncertain terms that now is the time for companies to review their non-GAAP measures and make any revisions called for by the new guidance.
With the new and revised CDIs, the SEC has delivered the latest in a series of increasingly strong warnings – previously made in remarks by the SEC Chair and senior Staff accountants – about the perceived misuse of non-GAAP measures. Commenting … Read more
Academics who profess expertise in corporate governance sometimes find themselves on very strange turf. That has been my status for the last two years, serving as an adviser to the U.S. Commerce Department in connection with the Obama Administration’s efforts to “privatize” the Internet Corporation for Assigned Names and Numbers (“ICANN”). ICANN is the non-profit entity that essentially manages the Internet’s domain name functions and oversees much of its internal plumbing. This privatization effort has now been challenged in Congress by Senator Ted Cruz and others, and political fireworks are likely. But let’s start at the beginning. In March … Read more
As we have previously observed, private fund advisers face a difficult challenge when SEC guidance (in the form of a speech or a public enforcement order) indicates that certain long-standing practices may be contrary to the securities laws. What does an adviser do when its past practices appear, in hindsight, to have fallen short?
While there are a number of potential “fixes”, including rebating fees, amending the fund documents, amending the Form ADV, and changing prospective practices, doing nothing is a particularly bad strategy. These situations are potential whistleblower events, even if the adviser is not yet aware of any … Read more
Reinsurance can be understood as simply insurer’s insurance. Under an insurance contract, a policyholder is protected from loss by transferring risk to an insurer; analogously, under a reinsurance contract, an insurer (the cedent or ceding company) is protected from exposure by transferring risk to a reinsurer. Insurers have an increasing demand for more financial capacity when underwriting catastrophic risks. The Cologne Reinsurance Company was the first professional reinsurance company, founded in 1842 following a catastrophic fire in Hamburg the same year. For over a century, reinsurance has been the preferred vehicle to shed primary insurers’ catastrophe risk exposure. For example, … Read more
On July 13, 2016, the Securities and Exchange Commission (“SEC”) adopted important amendments updating its rules of practice governing its administrative proceedings. These changes concern, among other things, the timing of hearings in administrative proceedings, depositions, summary disposition, the contents of an answer, admissibility of evidence and expert disclosures and the procedure for appeals. The amendments are intended to update the rules and introduce additional flexibility into administrative proceedings, while continuing to provide for the timely and efficient resolution of the proceedings. The amendments will become effective sixty days after publication in the Federal Register and will apply … Read more
Last week, news emerged that China had hacked the FDIC on several occasions during the past few years. This revelation renews concerns about the security of America’s financial institutions and comes on the heels of the third bank hacking through the Swift global payments network in the past year alone. What’s truly scary is that there may be further breaches of which we are simply unaware.
It’s possible to think of even more terrifying possibilities. What if hackers infiltrated the information systems of the San Francisco Federal Reserve Bank or the Federal Reserve Board of Governors rather than those of … Read more
On June 16, 2016, the US Securities and Exchange Commission (“SEC”) issued a proposed rule (available here), which, if adopted, would result in a revamp of its disclosure requirements for mining company issuers. The proposed rule is intended to harmonize the SEC’s mining property disclosure requirements with current industry and global regulatory practices and standards. The SEC is seeking comments on all aspects of the proposal. Initial comments are due 60 days after the proposed rule is published in the Federal Register.
The key changes proposed for mining companies are:
- requiring the disclosure of mineral resources (currently prohibited under
… Read more
The Securities and Exchange Commission proposed Regulation Fair Disclosure (Reg FD) on December 20, 1999. The motivation behind the proposal was concern that an informational advantage provided by selective disclosures to certain market participants was resulting in a loss of confidence in the integrity of capital markets. Thus, the SEC’s stated intention with Reg FD was to “level the playing field” for all market participants.
The proposal was met with a strong reaction by market participants, with over 6,000 comment letters issued in response, and the reaction was mixed. On the one hand, individual investors generally supported the proposal, expressing … Read more
Attackers last February reportedly stole $81 million from the Bangladesh Central Bank by obtaining and exploiting the bank’s credentials for the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. The attack – one of the biggest bank robberies in history – exploited weaknesses in cyber, fraud, and possibly insider threat controls, illustrating the need for banks to combine financial crime risk areas that were previously either siloed, or at best tenuously connected.
Specifically, the attackers exploited cyber weaknesses by designing custom malware tailored to bypass controls and network logging systems used by the Bangladesh Central Bank. The attackers also … Read more
Despite substantial judicial and public scrutiny, non-prosecution agreements (“NPA”) and deferred prosecution agreements (“DPA”) have retained their prominence as vehicles to resolve complicated corporate investigations, particularly for companies operating in regulatory environments. In the first half of this year, NPAs and DPAs remain in common use. We do not expect this trend to change. Thanks in part to a D.C. Circuit opinion affirming the critical independence and discretion that the U.S. Department of Justice (“DOJ”) has in crafting the terms of DPAs, we expect use of such agreements to remain widespread. Finally, tacitly acknowledging the utility of the U.S. DPA/NPA … Read more
A recent enforcement action reflects the CFTC’s expanded jurisdiction and provides further clarity on what constitutes “actual delivery” in cryptocurrency trading.
On June 2, 2016, the US Commodity Futures Trading Commission (CFTC) issued an order (the Bitfinex Order) filing, and simultaneously settling, charges against Hong Kong-based BFXNA, Inc., d/b/a Bitfinex (Bitfinex), in connection with Bitfinex’s operation of an online cryptocurrency trading platform (the Platform). Specifically, the Bitfinex Order finds that Bitfinex facilitated the execution of illegal, off-exchange commodity transactions in violation of the Commodity Exchange Act (the CEA) by (i) permitting retail and non-retail users to engage in financed … Read more
Much has been written and spoken in the immediate aftermath of the UK’s EU referendum about what the UK must do to leave the EU. We look at the key questions in this area, such as whether the UK has yet decided to withdraw, what it must do to withdraw, whether it can change its mind, and the position of Scotland.
What is the mechanism for leaving the EU?
The mechanism for the UK’s leaving the EU is set out in article 50 of the Treaty on European Union (see Box 1, overleaf). For withdrawal, article 50 requires:
… Read more
The Brent and WTI prices of crude oil fell by 60% between June 2014 and January 2015, marking one of the fastest and largest declines in oil history. Several potential factors (related to oil supply and demand) which could have influenced this oil price decline were discussed in an extensive World Bank policy research note by Baffes, Kose, Ohnsorge, and Stocker (2015). However, Tokic (2015) and a Bank of International Settlements report (Domanski, Kearns, Lombardi, and Shin, 2015) showed that production and consumption alone are not sufficient for a fully satisfactory explanation of the collapse in oil prices. Particularly, Domanski, … Read more